Labour’s private equity tax crackdown to exempt bosses who risk their own capital https://t.co/TeePnnOPjQ via @ft #pension #investing
— Josephine Cumbo (@JosephineCumbo) June 18, 2024
It is good to see some consistency between the messaging from the Labour party on growth and the detail on tax. You expect entrepreneurs to put up their capital and then pay income tax on the gains and one of two things will happen
- the entrepreneurs will retire
- they’ll go and do their thing elsewhere
Where people are putting their own money at risk, then they can expect to be taxed at less penal CGT rates or (where the investment is in VC – not all).
Reeves on the top of the FT building in the City of London
The knock on impact of taxing entrepreneurs as if they were wage-slaves would be to the great detriment of Britain’s growth and to the pension strategies that Rachel Reeves is encouraging
I do think it right that those who are simply milking private equity without risking their own money, get their bonuses taxed as income. This is right. The FT explainer is spot on.
Private equity managers are paid partly through carried interest, meaning they receive a portion of the investment profits made by their funds if they achieve returns above a certain level.
In the UK, this is taxed as a capital gain at a rate of 28 per cent rather than as income, which attracts a top rate of 45 per cent plus national insurance.
The preferential tax treatment of carried interest in many countries has allowed private equity executives to avoid income taxes on more than $1tn in incentive fees since 2000, according to Oxford university research.
Reeves said the £565mn annual tax figure Labour envisaged raising from its policy was based on research published by the Resolution Foundation in 2020 that estimated the revenue from taxing carried interest as income.
A similar costing based on the £5bn of carried interest earned by 3,000 people in the UK in the 2022 tax year would imply a windfall of close to £1bn for the Treasury, before allowing for emigration.
Some advisers to private equity firms said treating carried interest as income where no capital was at risk seemed fair.
“I don’t see how you can object to Labour’s position intellectually,” said one. “Nobody likes paying more tax, but you have to accept that eventually it has to go.”
Edi Truell
