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Labour could kill the entire private equity industry in the UK. Here’s how (explained simply). The newly-elected Labour government is planning to close a ‘loophole’ that private equity managers use to pay less tax. First, what’s private equity? Private equity is when investors pool their money into a fund. A fund manager then decides which private companies to buy, and aims to increase their value before selling them for a profit. Now, what’s the loophole that Labour's got a problem with? Well, when private equity funds becomes profitable, they pay out lump sums of cash to their investors. A percentage of this profit will go to the private equity manager as a bonus — this is called “carried interest”. High-performing managers receive this bonus as well as their normal salary. The issue is that, right now, carried interest is taxed as capital gains (at 28%) rather than income (taxed at 45%). Labour thinks this is a loophole which unfairly helps wealthy people — they want carried interest to be taxed as income. They say the change will raise £600 million in taxes which could be used for things like funding the NHS. More tax revenue for public spending? Sounds like a great idea! But, here's why it might backfire. The UK private equity industry (obviously) isn’t happy about the proposal. They argue carried interest is not “income” — investors’ money is tied up in a risky fund for 10+ years before the managers receive any payout. So it’s more like the “capital gains” you’d make on selling your house after a long time. Private equity funds are so unhappy that they're threatening to leave the UK if the change happens. Where would they go? Well, France, Germany and Italy have tax rates of 25% to 30% for carried interest. And if the funds leave, the UK government could *actually lose* tax revenue as they'd pay nothing here. So, the key question is this: Will the additional tax revenue from closing the ‘loophole’ outweigh the potential losses if private equity firms leave the UK? (plus, the change would damage London’s reputation as a private equity hub) Enjoyed this post? This is what we do at LittleLaw. We make commercial news accessible to make you a more confident lawyer. 💌 Sign up using the link in the comments

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