Labor will tackle the private equity tax loophole in its election manifesto

Labor is set to announce measures to close a significant tax loophole that currently allows thousands of private equity investors to avoid income tax.

This initiative will form a key part of the party’s general election manifesto, which is expected to be unveiled this week.

Currently, profits from private equity deals are taxed as capital gains at a rate of 28%, instead of the higher income tax rate of 45%. Labor plans to reclassify ‘carried interest’ – the part of profits made by private equity fund managers – so that it is taxed as income. Shadow Chancellor Rachel Reeves estimates that this change could raise up to £440 million to fund essential public services.

The Resolution Foundation, a think tank, estimates that interest amounts to £2 billion annually, with around 2,000 recipients each receiving an average of £1 million per year. Labour’s proposal to tax these profits at the higher income tax rate has been on the table since 2021, but the private equity sector has warned such a move could deter international investment into Britain.

A Labor insider commented: ‘We are going to close the tax loophole that allows private equity fund managers to pay capital gains tax on their bonuses, and instead tax them as income. This will help fund vital investments in our public services.”

While the private equity sector has anticipated a crackdown, it remains to be seen how Labor’s proposed changes will be implemented. Potential reforms could target individuals who receive carried interest without investing directly in a fund, with an emphasis on those who are part of a broader management team. Conversely, those who have invested their own money rather than borrowing may receive different tax treatment.

This issue has caused controversy for years, both in Britain and internationally. It is striking that former US President Donald Trump promised during his campaign to tackle this tax practice, but did not follow through after his term of office.

Labour’s position signals a firm commitment to ensuring a fairer tax system, with the aim of redirecting resources towards improving public services and tackling long-standing economic inequalities. The private equity sector will be closely watching the details of Labour’s proposals as they unfold.