Labour is set to announce measures to close a significant tax loophole that currently allows thousands of private equity investors to avoid paying income tax.
This initiative will be a key feature in the party’s general election manifesto, which is expected to be unveiled this week.
Currently, profits made from private equity deals are taxed as capital gains at a rate of 28%, rather than the higher income tax rate of 45%. Labour plans to reclassify “carried interest” — the share of profits made by private equity fund managers — so that it is taxed as income. Shadow Chancellor Rachel Reeves estimates that this change could generate up to £440 million to fund essential public services.
The Resolution Foundation, a think tank, estimates that carried interest amounts to £2 billion annually, with approximately 2,000 recipients each gaining an average of £1 million per year. Labour’s proposal to tax these profits at the higher income tax rate has been on the table since 2021, but the private equity industry has warned that such a move could deter international investment in the UK.
A Labour insider commented, “We’re going to close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, and tax it as income instead. This will help pay for crucial investment in our public services.”
While the private equity sector has anticipated a clampdown, it remains to be seen how Labour’s proposed changes will be implemented. Potential reforms might target individuals who receive carried interest without directly investing in a fund, focusing on those who are part of a broader management team. Conversely, those who have invested their own money rather than borrowing might see different tax treatment.
This issue has sparked controversy for years, both in the UK and internationally. Notably, former US President Donald Trump pledged to address this tax practice during his campaign but did not follow through once in office.
Labour’s stance signals a firm commitment to ensuring a fairer tax system, aiming to redirect funds towards enhancing public services and addressing long-standing economic inequalities. The private equity industry will be closely monitoring the specifics of Labour’s proposals as they unfold.