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A Labour government would crack down on the private equity industry by ending a loophole that allows executives to pay a reduced rate of tax on their bonuses, shadow chancellor Rachel Reeves will announce on Monday.
Reeves will argue that cancelling the “carried interest loophole”, which means buyout company chiefs can keep bigger payouts, would end a major unfairness in the tax system — and raise £440m a year for the exchequer.
The intervention comes just days before Keir Starmer’s first full Labour conference as leader — held in Brighton — where he will be expected to flesh out his vision for the party’s future.
The shadow chancellor said that nearly 60 per cent of major retailers that had entered administration in the last decade were linked to private equity — including HMV, Maplin, Comet, Debenhams and Toys R Us.
She also accused the industry of asset-stripping a “series” of strategically important British firms including GKN, the aerospace and automobile components supplier.
Reeves said the current regime on carried interest meant tax breaks for fund managers averaging £170,000 per person. Critics say the tax treatment of these payments has helped a small but powerful group of financiers to amass enormous wealth.
Additional rate taxpayers on over £150,000 a year pay 28 per cent on carried interest, compared to 45 per cent on their salary.
Just over 2,000 people received £2.3bn in carried interest in 2017, equivalent to more than £1m each, according to research by the University of Warwick and the London School of Economics which used the most recent data available.
Taxing this as income instead of at the lower capital gains rate would have raised £440m, assuming the recipients paid the higher tax rather than left the country to avoid it, the report found.
“Instead of hitting working people and businesses with tax rises, we should be spreading the burden and creating a fairer system,” Reeves said.
“It’s not right that working people and ordinary businesses have been hit by a jobs tax, while private equity fund managers don’t have to pay a penny more on their income, and are in fact handed a tax break by this government as they asset-strip some of our most valued businesses.”
Reeves said it was unfair that other professions had to pay income tax on earnings and bonuses.
Typically, private equity dealmakers receive a 20 per cent share of the profits from the funds that they invest on behalf of pension funds and other institutions, once a minimum threshold is passed, and these payouts are referred to as “carried interest”.
In the UK, private equity executives’ ability to pay lower tax rates on these often-lucrative sums than workers pay on annual wages over £50,000 dates back to a deal struck in 1987, in the early days of an industry that has since ballooned.
Because executives invest some of their own money in order to be entitled to the payments, they are taxed as a capital gain rather than at the higher income tax rate. The private equity industry argues they are not bonuses but investment returns.
Critics say the sums the executives invest are small and often funded through non-recourse loans, meaning they are not putting money at risk. Private equity executives typically contribute between 1 and 3 per cent of a fund, according to lobby group the British Private Equity and Venture Capital Association.
The UK’s Office of Tax Simplification last year recommended that the government consider bringing capital gains tax more closely into line with income tax rates. At the time, the BPEVCA argued tax rises could drive the industry out of the UK and reduce entrepreneurship.
But several senior figures in the sector said privately that they did not expect an exodus even if the rules changed, because London is an important market for buyout groups.
“I think most people even in private equity know that taxes will have to rise,” a senior London-based private equity executive said last year. “Fair enough.”
Bridgepoint, the UK private equity firm that listed in London this summer, has come under fire for not disclosing how much money its top executives make in carried interest, sums which in the buyout industry can amount to many multiples of salaries.
In the US, former presidents Barack Obama and Donald Trump both pledged to end the carried interest tax break but did not succeed. President Joe Biden has announced plans to eliminate it. Though this has triggered a backlash, others admit reform is overdue. “Private equity execs can’t believe they’ve got away with it this long,” one US-based finance industry boss said. “It’s just immoral.”.