Rachel Reeves to spare PE bosses top UK tax rate in compromise on ‘loophole’

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Rachel Reeves, the UK chancellor, is not expected to hit private equity bosses with the top 45p tax rate in this month’s Budget, as she looks for a compromise deal to close tax “loopholes” that does not drive investors out of Britain.

Reeves told the Financial Times ahead of an international investment summit in London next week — to be attended by about 250 major investors — that she would not be “ideological” about taxing the wealthy.

Senior government insiders said she was looking for a “compromise” over the taxation of private equity bosses, intended to raise money but not so much that Britain’s competitiveness was harmed.

“We are approaching this in a responsible way and we need to make sure we aren’t reducing investment in Britain,” Reeves told the FT in an interview on Friday.

Private equity managers are paid partly through carried interest, meaning they receive a portion of the investment profits made by their funds if they achieve returns above a certain level.

In the UK, this is taxed as a capital gain at a rate of 28 per cent rather than as income, which attracts a top rate of 45 per cent plus national insurance.

One government insider noted that Labour’s manifesto only committed Reeves to closing tax loopholes, not to a full 45 per cent tax rate. Another said: “There will be a compromise on this.”

Labour’s election programme said: “Private equity is the only industry where performance-related pay is treated as capital gains. Labour will close this loophole.” The party had intended to raise £565mn a year from taking such action and has been consulting the industry on the issue.

The chancellor told the FT in June, before the election, that Labour would continue the UK’s favourable tax treatment of private equity executives in instances where fund managers put their own capital at risk.

But she said UK private equity bosses currently invested only “tiny” sums of their own capital, adding that the amounts were “lower than many other countries require” to qualify for favourable tax treatment.

Michael Moore, chief executive of the British Private Equity and Venture Capital Association, said it was vital that any new regime should be “internationally competitive”.

Industry sources say that if the current 28 per cent tax rate for carried interest rose above the “low 30s”, Britain could start to lose out to other jurisdictions including the US, Italy, Spain or France.

The Treasury declined to comment on tax speculation but said: “We are committed to reforming the tax treatment of carried interest, delivering fairness in this area of the tax system while recognising the vital role that our world-leading asset management industry plays in channelling investment across the UK.”

Reeves and Sir Keir Starmer, the prime minister, will on October 14 roll out the red carpet for investors at a London summit, but are under pressure to reassure their guests that the Budget on October 30 will not hit them with major tax hikes.

Some business figures have criticised the timing of the event. The non-attendance of Blackstone’s Stephen Schwarzman and JPMorgan Chase’s Jamie Dimon has led to speculation that it might be something of a damp squib.

But those close to the event say it is “completely oversubscribed” and that CEOs are being turned away. Attendees are expected to include Goldman Sachs chief David Solomon, former Google CEO Eric Schmidt, Larry Fink, chair and chief executive of BlackRock, and Helge Lund, chair of Novo Nordisk.

Reeves said: “Heathrow are having to expand their VIP section in the middle of October to accommodate the number of high net worth people coming to the country that week. We are really excited about the calibre of people and the amount of money they have under management.”

One person familiar with the preparations said the airport was bracing itself for a large influx of visitors through its VIP suite. That would require more staff than usual and appropriate volumes of food and drink. 

Meanwhile the Treasury denied a report in the Observer that Reeves might delay the ending of tax breaks for private schools. “It will come into force on 1 January as planned,” a spokesman said.