Business plans to raise £500m by closing tax loophole for fund managers | Policy

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Labor has announced plans to raise nearly £500m by closing a tax loophole enjoyed by a small number of private equity fund managers.

Shadow adviser Rachel Reeves said the proposal was one example of how the Labor government would begin “to end the injustice in the tax system” by ensuring that the wealthy do not avoid taxes while ordinary workers are required to pay more money nationally. insurance.

Although the amounts involved from the proposed rule change on ‘transfer interest’ are relatively modest compared to the amount collected through other government taxes, Labor points out that this is evidence of alternatives to the Tory plan to raise £12 billion a year from National Insurance rising.

Labor has been criticized for opposing the increase – dubbed the health and social care tax – without being able to give details of an alternative plan to raise funds for the sector. At the time, Reeves said other sources of income could have been taxed instead, but she was not specific about which ones would target Labor.

On Sunday, Reeves said Labor could raise up to £440m a year by closing the carry-on interest loophole. She said she would urge the government to do so in the next budget, but that the Labor government would implement the measure itself if the Conservatives refused.

Transferable interest refers to the share of profits made by private equity fund managers from an investment deal they pooled together. They are taxed at the capital gains tax rate rather than the income tax rate, which generally means that people pay a 28% tax rather than a 45% tax.

Only about 2,000 people receive portable interest income annually, but on average the amounts involved are £1 million.

Workers believe that the interest charged should be taxed as income because it is in fact a management fee, not a capital gain. The party says that it is common for private equity managers to contribute only 1-3% of the capital of the fund they have raised, but for them they take 20% of the profits.

The party also believes that closing this tax loophole will also reduce the incentive for private equity to engage in asset divestitures. It says nearly 60% of large retailers who entered into management between 2010 and 2019 were related to private equity acquisitions.

Reeves said: “Instead of hurting workers and companies by raising taxes, we should spread the burden and create a more equitable system. It is absurd that the current system around carry-over interest means tax breaks for fund managers averaging £170,000 per capita.

“It is not true that working people and ordinary companies have been hit by the job tax, when private equity fund managers do not have to pay a penny more on their income, and in fact they have been given a tax cut by this government because they own assets stripping some of our most valuable business “.

Speaking in the House of Commons on the day MPs approved a £12 billion National Insurance increase in principle, Reeves said income from rental property, sales, income from stocks and shares and income from inheritance are all examples of alternative forms of income that can be taxed more. strongly as a substitute for what the government was doing.

Exclusively for the Guardian and Financial Times.

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