Private equity advisers warn Labour’s plan to tax carried interest will wound City
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A top London private equity lawyer has warned that Labour’s plan to raise the tax rate on buyout executives could be more damaging for the UK capital’s status as a dealmaking centre than Brexit.
The fallout from possible departures of fund managers would have a ripple effect on the banks, law firms and consultants advising and working for them, according to the co-head of US law firm Paul, Weiss, Rifkind, Wharton & Garrison in London.
“It could be worse than Brexit for financial and advisory services in London,” said Neel Sachdev, who has hired more than 100 lawyers in London since September to spearhead a big expansion to service private equity firms.
A former partner at Kirkland & Ellis, he added: “Private equity is a significant business generator for London and any move by (private equity firms) to relocate out of the UK will have a damaging effect on the UK economy including for law firms in London.”
The rhetoric underlines mounting worries among UK buyout fund managers that if Labour wins the general election this year, shadow chancellor Rachel Reeves would go through with her plan to apply the top 45 per cent rate of income tax to carried interest — the share of the gain buyout executives receive when assets are sold.
Carried interest, which makes a large part of private equity managers’ incentive packages, is taxed at the lower rate of 28 per cent as a capital gain.
Some firms are making contingency plans to shift staff out of London if the tax changes come into play, according to industry insiders. However, advisers and private equity executives are hopeful that Labour will compromise and only increase the tax on carry by a few points, ensuring the UK remains in line with other European countries.
France, Italy and Germany tax carried interest at between 26 per cent and 34 per cent.
Reeves has come under pressure from colleagues to moderate her plan over concerns that it would make the UK less attractive to international investors and prompt an exodus that could outweigh the £400mn Labour estimates could be raised by ending the tax break.
Labour MPs have warned that the party, which is leading in the polls to win a general election expected this year, needs to find new ways to fund its spending plans after the Conservative government last week copied its policy to end the “non-dom” regime. The tax system has allowed wealthy foreigners to avoid paying tax on offshore income and gains. The government also extended a windfall levy on oil and gas companies, a move that had been part of Labour’s revenue-raising plans.
A public affairs adviser to global private equity firms said the Conservatives’ move would make it more difficult for buyout fund managers to negotiate a compromise on carried interest with Labour because the opposition party now had less headroom to fund its public spending pledges.
Labour has said previously that, if elected, it would “make the tax system fairer” by “closing unfair and inefficient tax loopholes” including those enjoyed by private equity fund managers.
One adviser said some professionals were relocating in anticipation of the tax increase. “These people are financially motivated,” the adviser said. “We are doing a pretty good job blowing ourselves up.”
While the private equity industry is small in terms of the number of people it employs — the carried interest regime is estimated by law firm Macfarlanes to benefit 2,550 people — it is a valuable source of fees for law firms, banks and consulting firms.
“Why would you kind of force another Brexit on ourselves by pushing out a really important [industry], which we’re great at compared to Europe,” one senior banker said. “It’s not going to be the head of a fund alone [moving from London and] sitting in an office in Paris. He’s going to want an ecosystem around him which can support it.”
One bank lobbyist said that a big increase in taxation of carry was likely to “pull at the thread” of the fabric of the City of London, as jobs in support industries such as banks and professional services would follow.
Previous tax rises have not dulled London’s allure, however, such as when former Tory chancellor George Osborne raised tax on capital gains from 18 per cent to 28 per cent in 2010. Brexit has since changed the calculus for the capital, though, prompting some investors to relocate to places including Paris and Milan.
A Labour spokesperson said the party had worked closely with industry on a review of the financial services sector. “The financial services industry is one of Britain’s greatest assets and Labour’s plan promises to build on this success, unlock investment and drive growth,” the person added.
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