Labour intends to close a significant tax loophole for private equity investors, focusing on ‘carried interest’ as a crucial part of their upcoming general election manifesto.
Currently, profits derived from private equity deals are taxed at the capital gains rate of 28%, as opposed to the higher 45% income tax rate. Labour’s proposal aims to reclassify ‘carried interest’—the share of profits garnered by private equity fund managers—so it is taxed as income. Shadow Chancellor Rachel Reeves projects that this policy could raise approximately £440 million annually, which would be directed towards essential public services.
The Resolution Foundation, an influential think tank, estimates the annual carried interest at around £2 billion, benefiting about 2,000 individuals who each receive an average of £1 million per year. Labour has been advocating for this change since 2021, although the private equity industry warns that such a move might dissuade international investment in the UK.
A Labour representative noted, ‘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.’ Potential reforms may specifically target those who receive carried interest without directly investing in a fund, focusing on broader management teams.
However, there may be different tax treatments for those who have invested their own money rather than relying on borrowed capital. This issue has been contentious both domestically and internationally. Former US President Donald Trump also promised to address this tax matter, but did not implement any changes during his tenure.
Labour’s stance represents a definitive commitment to a fairer tax system, with the aim of reallocating funds towards improving public services and tackling long-standing economic disparities. The private equity sector is expected to closely scrutinise the specifics of Labour’s proposals as they are revealed.
Labour’s commitment to closing the private equity tax loophole is a pivotal element of their election manifesto, reflecting their broader goals of economic equality and enhanced public services. As the details of the proposals unfold, the financial sector will be keenly observing the potential impacts.
