Private equity executives are preparing a campaign to water down Labour’s promise to end their favourable tax treatment in the UK as they build closer ties with the opposition party ahead of the general election.
The buyout industry has in recent months largely avoided directly lobbying the opposition party on the policy, instead presenting itself as a friend to a future Labour government, according to private equity figures.
The approach is part of a plan to better position private equity groups if Labour wins power and attempts to close a tax loophole that allows buyout bosses to pay less tax on part of their earnings.
Shadow chancellor Rachel Reeves pledged in 2021 that Labour would remove the loophole if elected, saying private equity was being handed a tax break “as they asset strip some of our most valued businesses”.
“Strategically the industry [has] tried to try to prove to Labour that it is a force for good,” said a person at one large private equity group.
“Labour will say they are closing a loophole but if they win, I think we’ll have to sit down with them and argue about how exactly they do that,” the person added.
Currently private equity dealmakers pay capital gains tax on carried interest — their profits above a certain threshold on successful deals — at 28 per cent rather than income tax at 45 per cent for higher earners. The regime has been estimated to benefit about 2,000 people.
Labour’s commitment to end the loophole is a test of party leader Sir Keir Starmer’s resolve to increase taxes on wealthy buyout executives even as he courts private investors to work with the party to improve growth.
Since the initial 2021 pledge, relations between Labour and the private equity industry have improved and the party has signalled its intent to marry public and private funds to increase low-carbon energy production.
At the recent Labour party conference in Liverpool, Starmer told a room of executives, including from private equity firms, that his party would form a “partnership” with business. “If we do come into government, you will be coming into government with us,” he told them.
But Labour insists it intends to stick with the tax plan.
“A Labour government would make the tax system fairer,” a party spokesperson said. They added Labour would do this by “closing unfair and inefficient tax loopholes” including those enjoyed by private equity fund managers.
They added that the party was “committed to working in partnership with business on our plans to unlock growth, invest in British industry and make working people better off”.
The British Private Equity & Venture Capital Association, the main UK trade body, has taken a leading role in the industry’s plans to minimise any changes to how carried interest is taxed.
Instead of persuading Labour to abandon the policy entirely, lobbyists at the BVCA have discussed using an argument that any tax increase on carried interest should be less severe, according to people familiar with the matter.
A number in the industry hope Labour will hold a public consultation that would serve as the moment to push for any changes to be diluted, some of the people said. Others see the formation of Labour’s election manifesto as the time to engage.
Over the past decade, private equity has taken on an increasingly influential role in the UK economy, acquiring retailers Morrisons and Asda, and sports clubs and franchises including Chelsea and the Six Nations.
Buyout groups also provide a valuable revenue stream for corporate law firms, investment banks and accountancy firms who earn billions of pounds in fees annually from advisory work.
The industry initially publicly objected to Reeves’ plan to overhaul rules on taxing “carried interest” but recently it has taken a more measured approach, according to private equity groups and Labour officials.
At an early summer meeting between Starmer and some of the biggest international private equity firms operating in the UK, including KKR, the issue was not broached, according to four people who attended or were briefed on the matter. KKR declined to comment.
Asked whether industry executives were simply being polite, one senior Labour official said: “These people are not polite.”
The precise timing of the private equity industry’s offensive is likely to depend on when Labour decides to put more flesh on the bone of its policy, said an industry figure briefed on the plans.
“We know each other’s position,” the person said. “We will engage when they’re ready.”
For now, the sector has focused on winning Labour’s backing for private capital as an engine for the economic growth that the opposition party believes can underpin its policy agenda.
“Infrastructure investment is going to be a key driver of dealmaking as governments need it and want it, but they don’t have the cash to achieve all the goals and targets they have set up,” Tara Davies, KKR’s co-head of European infrastructure, told the Financial Times last month.
“Private capital sees itself as part of the solution,” she added.
The BVCA has in the past year stepped up efforts to explain to politicians the benefits that private equity can bring to the economy. These have included a programme called MP Connect, which introduces politicians to buyout-backed businesses in their constituencies.
The lobbying strategy advocated by the BVCA has divided opinion within private equity. Some executives acknowledged they have had beneficial treatment for decades and are resigned to it coming to an end. Others think more could be done to lobby to preserve the existing tax rules. Earlier this year, law firm Macfarlanes published its own research warning of potential capital flight if Labour’s pledge became law. Macfarlanes declined to comment.
“We consistently emphasise the importance of a competitive regime that incentivises the industry to continue to build the UK into one the world’s pre-eminent hubs for private capital investment,” said BVCA chief executive Michael Moore.
He added that demonstrating private equity’s role “as an indispensable partner for growth” was “the strongest way to make the case for that competitive regime”.
The BVCA has said previously that the UK already has one of the highest rates of tax in Europe on carried interest and that treating these earnings as a capital gain rather than income reflects “the risk and long-term nature” of the investments involved.
But that view is not universally shared. “It is a generous system, I don’t think we can pretend it’s not,” said Chris Springett, a tax partner at wealth manager Evelyn Partners. “It’s attractive and helps bring the industry here.”
Labour has estimated that closing the tax loophole could net up to £440mn for the Treasury, a figure one senior party figure said was “conservative”. But it is unclear the extent to which removing the tax break would drive investment groups away from Britain.
Senior executives would be likely to remain in the UK but there could be a more gradual “drip drip” over time of investment groups prioritising other locations, warned two people at large financial firms.
“No one will move if tax is increased by a few per cent, life is too short,” one senior buyout industry executive said. “But if they increase it 20 per cent, there is no way people won’t leave.”