Labour’s plans to crackdown on private equity are only the beginning of the political dog fight
Political interest in private equity has ramped up over the last year.
After a string of high-profile political interventions on recent PE deals, from defence to retail, the Labour Party has made it their mission to scrap the carried interest tax rules that PE fund managers benefit from. Returns would no longer be booked as capital gains (taxed at 28 per cent) but as income (at 45 per cent).
Labour claims around 2,000 individuals would pay £170,000 more a year, raising around £440m for the Treasury. In revenue terms, this is peanuts – just 0.05 per cent of the total government tax take.
But this is not about money. It signals the start of a wider political debate ahead of the next election about regulation, taxation and private investment.
As the recent debate over the Health and Social Care Levy demonstrated, there may be public support for raising some taxes, but where the pain falls is crucial and often dictated by electoral considerations. Meanwhile, the government is keen to push forward a “levelling up” agenda that will surely rely heavily on private capital in the context of unprecedented pandemic-related borrowing, which could attract even more scrutiny.
This bigger picture should worry the private equity industry. It has few political friends willing to back it in public and the industry has been reluctant to defend itself. With influential players on both sides of the political spectrum (notably, the Daily Mail on the right) railing against it, Labour’s pledge on carried interest is unlikely to be the end of political appetite for digging into private equity. Although Labour might look a long way from power, their policies will inevitably influence the government. Despite the Conservatives’ huge parliamentary majority, the party is still battling with Labour in so-called “Red Wall” seats, which tend to be more economically left-leaning. Ultimately, Boris Johnson may decide to steal Labour’s clothes on this issue, as he has on much else.