Labour is signalling this weekend that it intends to clamp down on a loophole that allows thousands of investors in private equity deals to avoid paying income tax.
The party, which is ahead in the polls, intends to spell out in its general election manifesto this week that it wants to put a halt to the current arrangement where money made in private equity deals is taxed as capital gains, at a rate of 28 per cent, rather than at the higher rate of income tax of 45 per cent.
Rachel Reeves, the shadow chancellor, has estimated that she could raise up to £440 million to fund public services by changing the tax system for what is known as “carried interest” — a share of profits made by a private equity fund. It is regarded as a return on investment rather than income, so is taxed at the capital gains rate.
According to the Resolution Foundation think tank, carried interest amounts to £2 billion a year — an average gain of £1 million for the roughly 2,000 people who receive it each year.
Labour first raised the idea of changing the tax system for carried interest in 2021. The private equity industry has been trying to convince the party that such a move could deter big international private equity houses from investing in Britain. But a Labour source said: “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 industry has been braced for a clampdown on the tax, it will be waiting for the details of any changes.
For example, the reforms could be targeted at individuals who receive carried interest even if they have not invested directly in a fund but are just part of a wider fund management team. There have also been suggestions that the tax rate on carried interest would not change for individuals who have used their own money to invest in a fund rather than borrowed to make their investments.
The situation has caused controversy for years — and not just in Britain. Donald Trump had pledged to change the practice in America when he was running for president, but did not do so after taking office.
