Crackdown on work plans against the private equity tax loophole
A Labor government would crack down on the private equity industry by closing a loophole that allows executives to pay a reduced tax rate on their bonuses, fictitious Chancellor Rachel Reeves will announce on Monday.
Reeves will argue that closing the “deferred interest loophole,” which means buyout heads can keep larger payments, would end a major injustice in the tax system – and raise $ 440 million. pounds sterling per year for the Treasury.
The intervention comes just days before Keir Starmer’s first full union conference as a leader – held in Brighton – where he will be due flesh out his vision for the future of the party.
The shadow chancellor said nearly 60% of large retailers who had entered administration in the past decade were linked to private equity – including HMV, Maplin, Comet, Debenhams and Toys R Us.
She also accused the industry of robbing a “series” of strategically important British companies, including GKN, the supplier of aeronautical and automotive components.
Reeves said the current deferred interest regime meant tax breaks for fund managers of an average of £ 170,000 per person. Critics say the tax treatment of these payments has helped a small but powerful group of financiers accumulate enormous wealth.
Taxpayers at additional rates on more than £ 150,000 a year pay 28 percent on deferred interest, compared to 45 percent on their wages.
Just over 2,000 people received £ 2.3bn of deferred interest in 2017, or more than £ 1m each, according to research by the University of Warwick and the London School of Economics which used the most recent data available.
Taxing this as income instead of the lower capital gains rate would have raised £ 440million, assuming beneficiaries pay the highest tax rather than leaving the country to avoid it, according to The report.
“Instead of hitting workers and businesses with tax hikes, we should share the burden and create a fairer system,” Reeves said.
“It is not fair that ordinary workers and businesses have been affected by an employment tax, while private equity fund managers don’t have to pay a dime more out of their income and are in fact getting tax relief from this government as they rob some of our top companies. valued.
Reeves said it was unfair that other professions had to pay income taxes and bonuses.
Typically, private equity traders receive a 20% share of the profits of the funds they invest on behalf of pension funds and other institutions, once a minimum threshold is exceeded, and these payments are called “deferred interest”.
In the UK, the ability of private equity executives to pay lower tax rates on those often lucrative sums that workers pay on annual salaries above £ 50,000 dates back to an agreement concluded in 1987, in the early days of an industry that has since exploded.
Because executives invest some of their own money to qualify for payments, they are taxed as a capital gain rather than at the top tax rate. The private equity industry argues that it is not about bonuses but about returns on investment.
Critics say the amounts invested by executives are small and often funded by non-recourse loans, which means they don’t put money at risk. Private equity executives typically contribute between 1 and 3 percent of a fund, according to the British Private Equity and Venture Capital Association lobby group.
Last year, the UK Office of Tax Simplification advised that the government consider aligning capital gains tax more closely with income tax rates. At the time, the BPEVCA argued tax hikes could drive industry out of UK and reduce entrepreneurship.
But several industry figures have said privately they did not expect an exodus even if the rules change, as London is an important market for buyout groups.
“I think most people, even in private equity, know that taxes will have to rise,” a senior London-based private equity executive said last year. “Fair enough.”
Bridgepoint, the UK private equity firm listed in London this summer, has been criticized for not disclosing how much money their top executives make in deferred interest, sums which, in the buyout industry, can amount to several multiples of wages.
In the United States, former Presidents Barack Obama and Donald Trump both pledged to end deferred interest tax relief, but were unsuccessful. President Joe Biden announced is considering eliminating it. Although this triggered a backlash, others admit that the reform is late. “Private equity executives can’t believe they’re getting away with this long,” said a US-based finance boss. “It’s just immoral.”.