Labor is set to announce measures to close a major tax loophole that currently allows thousands of private equity investors to avoid paying income tax.
The initiative will be a key feature of the party's general election manifesto, which is expected to be unveiled this week.
Currently, gains from private equity deals are taxed as capital gains at a rate of 28%, rather than the top income tax rate of 45%. Labor plans to reclassify “carried interest” – the share of profits made by private equity fund managers – so that it is taxed as income. Shadow Chancellor Rachel Reeves estimates the change could generate up to £440 million in funding for essential public services.
The Resolution Foundation, a think-tank, estimates that the benefits it carries amount to £2 billion a year, with approximately 2,000 beneficiaries each receiving £1 million a year on average. Labour's proposal to tax these profits at the higher income tax rate has been on the table since 2021, but the private equity industry has warned that such a move could deter international investment in the UK.
A Labor insider commented: “We will close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, and tax them as income instead. This will help pay for crucial investment in our public services.”
While the private equity sector has expected a crackdown, it remains to be seen how the changes proposed by Labor will be implemented. Potential reforms may target individuals who receive carried benefits without investing directly in the fund, with a focus on those who form part of a broader management team. Conversely, those who invested their own money rather than borrowing may see different tax treatment.
The issue has sparked controversy for years, both in the UK and internationally. It is worth noting that former US President Donald Trump pledged to address this tax practice during his election campaign, but did not commit to it once he took office.
Labour's position signals a firm commitment to ensuring a fairer tax system, aimed at redirecting money towards strengthening public services and tackling long-standing economic inequality. The private equity industry will be closely monitoring the details of Labour's proposals as they unfold.
