Yahoo Finance Labour to close tax loophole for thousands of private equity investors
Labour is set to close a loophole that enables thousands of private equity investors to avoid paying income tax if it wins the general election.
The Sunday Times reported that the party’s election manifesto, due this week, is expected to outline plans to put a halt to money made in private equity deals being taxed as capital gains at a 28 per cent rate, rather than income at a rate of 45 per cent.
This “carried interest”, as it is known, is seen as a return on investment rather than income under the current system.
Shadow chancellor Rachel Reeves has estimated that she could raise up to £440m by changing the tax system on these deals.
Think tank the Resolution Foundation has found that carried interest amounts to £2bn a year, with an average gain of £1m for the approximately 2,000 investors who receive it every year.
The private equity industry is braced for a crackdown, with Labour first signalling it would change the system in 2021. Critics argue that closing the loophole would put off big international private equity firms from investing in the UK.
“We’re going to close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, and tax it as income instead,” a Labour source told The Sunday Times. “This will help pay for crucial investment in our public services.”
The size and scope of Labour’s planned crackdown remains unclear. It could target people who make carried interest gains as part of a wider management team, rather than investing directly in a fund.
It is also understood that the tax rate on carried interest may not change for those using their own money to invest in a fund.
City A.M approached Labour for comment.
