Jonathan Reynolds, the Business Secretary, said before the election that it was “absolutely right” to get rid of it, but private equity chiefs are hoping they can convince Labour to have a rethink now they are in power.
Gordon Brown pledged a crackdown on carried interest tax when he was prime minister, but never did cut it, while an attempt to change carried interest rules in the US was blocked by a senator in 2022.
Fierce lobbying from the private equity community is now heating up ahead of the Oct 30 Budget, with private equity tycoons planning to hobnob with influential politicians at this week’s Labour conference and next month’s investment summit.
An industry insider says that private equity has been “trumpet marching up and down Whitehall” trying to make the case for the Chancellor to back down on the idea by highlighting the economic benefits that it brings.
The Government estimates that it could raise more than £500m from the roughly 2,000 people who receive carried interest each year. But there are fears in City circles that taxing these individuals at 45pc would cost the Exchequer money instead of bringing it in, by leading to an exodus of cash and talent.
The action plan for private equity executives at this week’s Labour conference is to highlight to MPs which businesses in their constituency are private equity-backed, says one attendee, adding that the list includes “Hovis bread, Tangle Teezer, go-karting – we’ve got biotech and people who make doors, hairbrushes and bread”.
British companies backed by the industry include the supermarkets Asda and Morrisons, cafe chain Pret A Manger, defence company Cobham and Legoland operator Merlin.
The pitch to ministers is that private equity makes a major contribution to the UK economy and that any change could hand European Union rivals a competitive advantage – France, Italy and Germany all tax carried interest at between 26pc and 34pc.
The British Venture Capital Association (BVCA), the body representing the industry, has told the Treasury that the 12,000 businesses backed by private capital generated £137bn of GDP in 2023 while private equity directly employs 140,000 people.
BVCA boss Michael Moore argues that the job “involves taking risk” and the tax perk only kicks in when returns hit high thresholds.
Some private equity chiefs have clubbed together to hire external consultants with close political connections to fight this battle, sources say. But despite their efforts, industry veterans think the lobbying has already failed.
Jon Moulton, the boss of private equity firm Better Capital, says “many think the battle is already lost so will vote with their feet”.
“Quite a few private equity firms professionals are actively looking to move away from UK taxes,” he says. “For those working across Europe from a UK base it’s not a real hardship to move their tax base to [somewhere like] Ireland or Luxembourg.”
Sir Michael Spencer, a City tycoon and Tory donor, suspects the Government will harmonise capital gains tax with income tax which will “remove entirely the current tax advantage of carried interest”. He expects some private equity barons to relocate as a result, “especially if they have few ties to the UK”.