Rachel Reeves wants to close a lucrative tax loophole for private equity firms that she says would provide an “immediate injection” of £440 million per year to be spent on public services.
So what? The doorway to No.11 lacks headroom. Taxing private equity bosses at a sensible rate is one way to bring in sorely needed cash to the Treasury. But it also risks alienating City people whom Labour has worked hard to charm.
Cash and carry. “Carried interest” or “carry” is a stake that private equity executives take in the funds they manage instead of additional salary or bonus. If the business acquired by the fund has a successful turnaround, that interest becomes enormously valuable as the management team typically receives 20 per cent of the profit when assets are sold (as well as a 2 per cent fee).
Due to a lobbying coup in 1987, these payouts are taxed as capital gains at a rate of 28 per cent. Labour has stated it would like to see them taxed as income at 45 per cent. Nicholas Ferguson, former chair of SVG Capital, once broke a taboo on talking about the carried interest loophole by saying some executives “pay less tax than a cleaning lady”.
By the numbers:
- £2.7 billion – “carry” estimated to have been shared between 245 UK individuals in 2021/22.
- £277,700 – average base pay for a partner at a European private equity firm in 2023, up 6 per cent on 2022.
- £600 million – potential increase to annual UK tax take from taxing at the full marginal rate, according to lawyer Dan Neidle.
The BVCA, a lobby group for private equity in the UK, is pushing back in the hope that Reeves will either drop the pledge she made in 2021 or water it down by compromising with a new rate between 28 and 45 per cent.
Given that most private equity firms aggressively use debt as a tax shield and don’t operate under the same regulations and reporting requirements as public companies – it’s a big ask.
- Michael Moore, the group’s chief executive, says it’s looking to “maintain the internationally competitive arrangements which attract capital and investment professionals to the UK”.
- Neel Sachdev, a prominent PE lawyer, said recently that a full tax on carry would be “worse than Brexit” for London’s financial and advisory services.
Staying in the loop. France, Italy and Germany currently tax carried interest at between 26 per cent and 34 per cent. In the US, investment fund managers pay a 20 per cent capital gains rate.
Biden and his predecessors, including Trump, have tried repeatedly to close the hole – a move supported by big Wall Street names including Bill Ackman and Michael Bloomberg. The most recent attempt ran aground last year after it was dropped from the Inflation Reduction Act to secure support from Kyrsten Sinema, a Democratic senator who has received more than half a million dollars in donations from executives at PE firms like KKR, Carlyle and Apollo.
Reeves’ resolution. Pressure on the shadow chancellor to follow through with the tax on carry is strong. Not just because it’ll play well with voters and the party but because her other cash piñata – scrapping non-dom tax status – has already been filched by the Conservatives.
Dale Vince, the founder of Ecotricity and a major Labour donor, says the argument that capital or dealmakers would leave Britain if the loophole closed is “bollocks”. Likewise he says private equity’s sway over Britain’s infrastructure is overstated: “This is just a tax gift for some extremely rich people; another example of where we tax money made with money at a lower rate than the money made with a pair of hands.”
For a resurgent Labour Party, it might seem like a no-brainer; the carried interest loophole benefits an estimated 2,000 people in all. But the Mais Lecture Reeves gave to City grandees this week was notable for its promise to “crowd in private investment”, its emphasis on “stability” and its omission of the word “loophole”. This might be because, as one executive put it, “they do not want to prod the bear too much”.
The Labour Party wouldn’t comment on whether it would be watering down the pledge.
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