Reeves rethink

Labour may ease plan for higher tax on private equity

Rachel Reeves
Rachel Reeves: taxing risk may not be appropriate (pic: Terry Murden)

Private equity managers who invest their own money to finance deals may escape a tax increase, the Shadow Chancellor Rachel Reeves has indicated.

Ms Reeves had targeted private equity managers’ carried interest – the share of profit from successful deals they handle.

Carried interest is taxed as a capital gain at 28%, but Labour has argued that it should fall under higher 45% rate of income tax.

Ms Reeves has now signalled a softening in Labour’s position towards those who risk their own capital. Carried interest can make up the bulk of the pay earned by managers in the private equity industry.

“I don’t think it is right that … what is essentially a bonus is taxed at a lower rate than employment income, when you’re not putting your own capital at risk,” she told the Financial Times. “If you are putting your own capital at risk it is appropriate that you pay capital gains tax.”

Labour’s plans have caused shivers throughout the buyout industry and one businessman involved in deals told Daily Business last week that it could impact severely on his own plans to invest.

Some private equity managers have considered leaving the UK to seek lower rates. In Germany, the effective rate of tax on carried interest is 28.5% and in France it is 34%.

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