In a stunning display of lobbying prowess, the UK private equity industry has managed to convince the Labour party to significantly water down its proposed tax hike on carried interest – the lucrative share of profits that private equity bosses receive after buying, turning around, and selling businesses. This remarkable climbdown represents a major victory for the industry and highlights the immense influence wielded by this small but powerful corner of the financial sector.
A Multimillion Pound Tax Perk Under Threat
Carried interest, often referred to as “carry” in the industry, has long been a controversial tax loophole that allows private equity partners to pay a significantly lower rate on their earnings compared to the average high-income earner. While most City bonuses are subject to a 45% income tax rate, carried interest is taxed as a capital gain at just 28%. This discrepancy has drawn criticism from those who view it as an unfair advantage for an already wealthy elite.
Labour, under the leadership of Rachel Reeves, had initially pledged to crack down on this “indefensible” tax break, aiming to raise £565 million a year by aligning the tax treatment of carried interest with that of regular income. The funds generated from this tax reform were earmarked for crucial public services, including the hiring of 8,500 new mental health staff and the provision of legal aid for disaster victims.
The Lobbying Machine Springs into Action
Faced with the prospect of a significant tax increase, the private equity industry mounted one of the most successful lobbying campaigns in recent UK history. The British Private Equity and Venture Capital Association (BVCA), which represents major firms such as Warburg Pincus, KKR, and Apollo, spearheaded the effort to persuade Labour to reconsider its stance.
The BVCA, led by astute political operators like chief executive and former Liberal Democrat MP Michael Moore, recognized the need to reframe the narrative surrounding the private equity industry. Rather than focusing on the small group of predominantly male, London-based professionals who benefit most from carried interest, the BVCA sought to emphasize the broader economic impact of private equity-backed businesses.
The chancellor was talking about [the private equity industry as] asset strippers three years ago. We had to set out the stall, as we saw it, accurately.
– Michael Moore, BVCA Chief Executive
Leveraging Economic Data and Political Connections
Armed with a report by the consultancy EY, which showed that private equity-backed businesses accounted for about 6% of UK GDP and supported 2.2 million jobs across the country, the BVCA lobbied shadow cabinet members, including Rachel Reeves, at roundtables and through a comprehensive response to the government’s consultation on the tax rise.
The BVCA also organized tours for dozens of MPs, including the now deputy prime minister, Angela Rayner, to visit private equity-backed businesses in their respective constituencies. These efforts were bolstered by Moore’s relentless media appearances, as well as high-profile meetings with global financiers, such as Blackstone boss Stephen Schwarzman, at events like the Global Investment Summit and the Labour party conference.
The Specter of a Competitive Disadvantage
Lobbyists also raised concerns that a 45% tax rate on carried interest would put the UK at a competitive disadvantage compared to other European countries, where rates range from 26% to 34%. Prominent London private equity lawyer Neel Sachdev warned that such a hike could prove more detrimental to London’s status as a dealmaking hub than Brexit, potentially triggering an exodus of wealthy executives to lower-tax jurisdictions.
I worried that [some of the lobbying] tactics used were a bit heavy-handed.
– Anonymous Private Equity Manager
Labour’s Concession and the Road Ahead
Ultimately, the sustained pressure from the private equity lobby proved too much for Labour to resist. In her inaugural budget, Rachel Reeves announced a more modest increase in the carried interest tax rate, from 28% to 32% – a far cry from the original plan to align it with the 45% income tax rate. This climbdown is expected to raise just £300 million for the exchequer by 2030, significantly less than the £565 million per year initially proposed.
While the industry has welcomed the government’s decision to listen to its arguments, some insiders believe that the lobbying tactics employed were overly aggressive. As the government prepares to launch a consultation on the tax treatment of carried interest from 2026 onward, the BVCA and its members are gearing up for the next phase of negotiations, focusing on securing preferential treatment for fund managers who invest their own money alongside their clients.
As the battle over carried interest taxation continues, it remains to be seen whether the Labour party will be able to strike a balance between appeasing the powerful private equity lobby and fulfilling its commitments to fund critical public services. The outcome of this struggle will have far-reaching implications not only for the industry itself but also for the countless individuals and communities who stand to benefit from the tax revenues generated by a more equitable system.
