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Shadow Chancellor Rachel Reeves has indicated that Labor will continue favorable tax treatment of private equity executives in Britain in cases where fund managers are putting their own capital at risk.
Labor has pledged to raise £565 million a year by closing the ‘loophole’ that allows private equity managers to have part of their income, known as carried interest, taxed as capital gains rather than income , which has a much higher tax rate. .
Reeves told the Financial Times that private equity fund managers would have to pay income tax on the money they make from successful deals if they had not invested their own capital.
“I don’t think it’s right. . . what is essentially a bonus is taxed at a lower rate than employment income, if you don’t put your own capital at risk,” she said.
But she added: “If you are putting your own capital at risk, it is appropriate that you pay capital gains tax.”
Asked whether she expected most carried interest in Britain to be taxed as income under this broad approach, Reeves said: “Yes”.
Reeves said UK private equity bosses had currently invested only ‘small’ amounts of their own capital, adding that the amounts were ‘lower than many other countries require’ to qualify for favorable tax treatment.
Many private equity managers co-invest in their funds and contribute 1 percent of the starting capital. France and Italy typically allow reduced tax rates on carried interest if fund managers invest that amount.
Labor’s promised crackdown on private equity managers is one of a relatively limited series of tax increases that the opposition party has pledged if it wins Britain’s July 4 general election, as currently expected.
Reeves said the costs in Labour’s manifesto, which said the measure would raise £565m annually between 2028 and 2029, were “an estimate of how much we would try to raise and what we would do with that money”.
She said if elected, Labor would consult on the changes.
Private equity managers are paid in part through carried interest, meaning they receive a share of their funds’ investment gains if they achieve returns above a certain level.
In Britain this is taxed as capital gains at a rate of 28 percent rather than as income, which carries a top rate of 45 percent plus national insurance.
Preferential tax treatment of carried interest in many countries has allowed private equity executives to avoid income taxes on more than $1 trillion in incentive payments since 2000, according to research from the University of Oxford.
Reeves said the £565 million annual tax figure Labor planned to raise from its policies was based on research published by the Resolution Foundation in 2020 that estimated revenue from taxation as income.
The think tank did not take into account any behavioral effects of such a change, such as fund managers leaving the UK as a result.
A similar cost calculation, based on the £5 billion in carried interest earned by 3,000 people in Britain in the 2022 tax year, would imply a windfall of almost £1 billion for the Treasury before emigration is made possible.
Some advisers to private equity firms said it seemed fair to treat carried interest as income with no capital at risk. “I don’t understand how you can intellectually object to Labour’s position,” said one. “Nobody likes paying more taxes, but you have to accept that it has to go eventually.”
But some in the sector are gearing up to ensure the proposals are watered down in any consultation held by Labor if it comes to power.
One industry figure said he believed Labor still had “an open mind on the details” of the proposals.