A Labour government would allow private equity dealmakers to continue to benefit from a lower tax treatment on profits when their own cash is at risk, shadow chancellor Rachel Reeves has suggested.
In its manifesto last week, Labour confirmed plans to close a tax break for private equity fund managers in which they pay a lower rate of capital gains tax on part of their investment profits, known as carried interest, rather than the higher rate of income tax.
The move has unsettled the UK’s buyout industry and triggered fears of an exodus to jurisdictions where carried interest is still taxed at the lower rate of capital gains. So-called ‘carry’ is one of the key ways that fund managers make cash, allowing them a share of the profits when an asset is sold.
However, Reeves has looked to draw a distinction in the plans today by claiming that fund managers should only pay the income tax rate if they had not invested their own capital.
“I don’t think it is right that . . . what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk,” she told the Financial Times.
“If you are putting your own capital at risk it is appropriate that you pay capital gains tax,” she added,
Fund managers typically invest around one per cent of their fund’s total capital, meaning they could still be in line to benefit from a break on the profits. However, Reeves clarified that most carried interest in the UK would still likely be taxed as income under Labour’s plans.
The comments may assuage some fears among senior private equity figures over the impact of the planned crackdown, which is expected to pocket Labour about £565m in tax revenue.
Labour’s carried interest plans have been one of the major points of contention in a major charm offensive on the City and financial services sector over the past two years.
In a report by investment bank Investec earlier this year, about 30 per cent of respondents signalled that they would relocate outside of the UK if the tax rate on carry was increased.
Some 42 per cent said nothing would change, while five per cent said they would change careers entirely.
According to a new paper from Ludovic Phalippou, a professor at Oxford’s Said School of Business, the world’s largest buyout firms, venture capital funds and infrastructure investors have earned more than $1trn (£780bn) in carried interest pay since 2000.