PE Tech Report


Like this article?

Sign up to our free newsletter

UK Labour’s private equity tax crackdown to exempt bosses risking their own capital

The UK’s Shadow Chancellor Rachel Reeves has indicated that the Labour Party will uphold favourable tax treatment for private equity executives in cases where fund managers invest their own capital, according to a report by the Financial Times. 

Labour aims to generate £565m annually by closing what it describes as a “loophole” that permits private equity managers to have a portion of their earnings — known as carried interest — taxed as capital gains rather than income. The latter is subject to a much higher tax rate. 

In an interview with the Financial Times, Reeves stated that private equity fund managers should pay income tax on their earnings from successful deals if they have not invested their own capital. 

She said that she disagreed with “what is essentially a bonus is taxed at a lower rate than employment income when you’re not putting your own capital at risk”. 

“If you are putting your own capital at risk it is appropriate that you pay capital gains tax.” 

She affirmed that most carried interest in the UK would be taxed as income. 

Reeves highlighted that UK private equity bosses currently invest only “tiny” sums of their own capital, adding that these amounts are “lower than many other countries require” to qualify for favourable tax treatment. Typically, private equity managers co-invest in their funds, contributing around 1% of the initial capital. In France and Italy, fund managers can qualify for reduced tax rates on carried interest if they invest similar amounts. 

Reeves clarified that the £565m annual tax figure Labour plans to raise by 2028-29 is based on 2020 estimates from the Resolution Foundation, though the think tank’s research did not consider potential factors such as fund managers relocating from the UK. 

Preferential tax treatment of carried interest in many countries has enabled private equity executives to avoid paying income taxes on over $1tn in incentive fees since 2000, according to recent research from Oxford University.

Like this article? Sign up to our free newsletter