Labour’s plans to close the “carrying interest” private equity sector loophole has led to several funds and executives considering moves to countries with more beneficial tax regimes, such as Italy and Spain.
Several of Britain’s private equity managers and firms may be contemplating a move abroad, in anticipation of the new Labour government’s proposed changes to tax law.
It’s understood that the new chancellor, Rachel Reeves, wants to close a tax loophole that allows private equity fund managers to pay a lower capital gains tax rate of 28% on all profits earned, rather than the usual income tax of 45%.
This is mainly due to private equity managers often investing their own money alongside businesses and entrepreneurs into funds, as well as accepting relatively lower salaries for years, until a fund is successful enough to pay out large lump sums, often several years down the line. Only once profits reach a certain threshold do the managers also receive a cut, usually 20%.
However, many firms never reach that stage at all, due to several factors, such as economic uncertainty, changing regulations, higher debt burdens and unstable strategies, amongst others.
Now, Labour’s new tax law could make private equity managers rethink the amount of risk they are willing to take, if the long-term payout is lessened. This could make it difficult to attract new talent into the industry, as well as lead to established managers and funds moving to more welcoming overseas markets
Labour has highlighted that it expects to rake in about £565 million (€668.92 million) by implementing this new law, which it plans to invest in mental health.
What would ending the carrying interest law mean for the UK private equity sector?
Regarding how the British private equity sector might change under the new tax laws, Anne Glover, chief executive of venture capitalist firm Amadeus Capital Partners said, as reported by The Telegraph: “It would change the economics for all of the people who work in it dramatically. Instead of working for 10 to 12 years to achieve a great capital outcome alongside entrepreneurs who are also getting a great capital outcome, you get taxed as if it was income, which it isn’t.
“It’s recognised worldwide that it’s appropriately taxed as capital gain. So we would be quite out of step with the rest of Europe and the US if we did change those rules.”
She also pointed out that it is relatively easy for both private equity firms and fund managers to set up shop elsewhere in Europe, as well as further afield given that, very often, they already have global operations.
More UK-based private equity managers have started to look into buying property and setting up their companies abroad in the past few months.
Some of the destinations being considered include Spain, Italy, Switzerland and Portugal, mainly due to these countries having more favourable tax systems. This exodus has also especially been fuelled due to fears that the new Labour government might try to implement backdated taxes.
What other sectors could face changes under Labour?
Labour has also cracked down on other sectors, such as oil and gas, with plans for ramping up clean energy in Britain being one of its key manifesto promises.
As such, it has continued to make improvements to its Green Prosperity Plan, first revealed in 2021, which aims to deliver clean power by 2030.
According to the Labour manifesto: “We have tremendous untapped advantages: our long coastline, high winds, shallow waters, universities and skilled offshore workforce combined with our extensive technological and engineering capabilities.
“With a serious industrial strategy and a genuine partnership between the public and private sectors, we can make Britain a clean energy superpower.
“The Green Prosperity Plan will be funded in part by a time-limited windfall tax on the oil and gas giants making record profits, with the rest of the funding coming from responsible borrowing to invest within Labour’s fiscal rules – catalytic investment that will leverage higher private investment and boost economic growth.”