“I’m glad I don’t have to look into moving to Paris, put it that way,” said one senior private equity manager from his office near Gloucester Road tube station in the wealthy London enclave of Kensington.
He was among a raft of private equity bosses nursing hangovers in some of the capital’s smartest postcodes on Thursday, a day after the Labour party unveiled its first budget in 14 years. “I don’t often drink these days but a few of us did go out for drinks to celebrate,” he chuckled.
The reason for the industry’s jubilation? Labour’s major climbdown on its planned tax raid on carried interest – the share of profits that senior private equity bosses make after buying, turning around and selling a business.
Known colloquially in buyout land as plain “carry”, it is a hugely lucrative perk that sees private equity partners take home multimillion pound sums that are taxed at a far lower rate than income.
Rachel Reeves had originally pledged to raise £565m a year by cracking down on the “indefensible” tax loophole that left carried interest taxed as a capital gain at 28%. That compares with the 45% rate of income tax applied to higher earners and most City bonuses.
But after one of the most successful UK lobbying campaigns in recent history, this small but influential corner of the financial industry convinced the Labour party that private equity bosses were too rich and too mobile to shoulder more of Britain’s tax burden.
Three years after the future chancellor described the industry as asset strippers, she used her inaugural budget on Wednesday to announce a far more modest rise to 32%.
The move will raise just £300m for the exchequer by 2030, a far cry from the £565m a year that was cited in Labour’s manifesto, and earmarked to support 8,500 new mental health staff, as well as legal aid for disaster victims.
Official statements from the likes of the British Private Equity and Venture Capital Association (BVCA) lobby group have been quietly congratulatory, noting that the government had “listened to our arguments on the value of the private capital industry and how important this sector is to the economy.”
In reality, it is a significant coup for its members, particularly the 3,140 private equity professionals who shared £3.7bn worth of carried interest payouts in 2023, according to data gathered by the University of Warwick’s Centre for the Analysis of Taxation (CenTax).
The BVCA, which represents firms including Warburg Pincus, KKR and Apollo, has successfully shifted attention away from this relatively small group, which unhelpfully – given Labour’s efforts to appeal to the working class – fit the “City” stereotype more than other corners of the financial sector.
Here, men make up 85% of carried interest recipients, while residents of Kensington alone received 16% of payouts. That is more than the 12% received by all regions of the UK outside London and the south-east.
The BVCA, headed up by sharp political movers such as its chief executive and former Liberal Democrat MP Michael Moore, knew it needed to put a much more accessible face on the otherwise elite industry. It also needed to shed a harmful reputation for asset-stripping, where private equity firms heap companies with debt, sell off their assets, and flip them on for a profit.
“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,” Moore said.
Economic data proved to be one of the strongest cards in their hand.
Moore credits a report by the consultancy EY last year which showed that private equity-backed businesses accounted for about 6% of UK GDP and supported 2.2m jobs across the country, including in sectors like biotech and clean energy, which were key to the new government’s growth agenda.
Trotting out those figures was essential, as the BVCA lobbied shadow cabinet members including Reeves at roundtables, and bulked up its response to the government’s month-long consultation on the tax rise this summer.
That data also proved valuable as it toured dozens of MPs, including the now deputy prime minister, Angela Rayner, around private equity-backed businesses in their respective constituencies. That is to say nothing of Moore’s non-stop media rounds, TV and conference appearances over the past year.
Several dinners, including with Blackstone boss Stephen Schwarzman in New York in August, and rubbing shoulders with global financiers at the Global Investment Summit and Labour party conference, also started to shape Reeves’s views.
Lobbyists were also keen to warn that a 45% hike would put the UK at a competitive disadvantage, noting that France, Italy and Germany tax carried interest at anywhere between 26% and 34%.
The top London private equity lawyer Neel Sachdev, sparked fear in March when he warned that a tax hike could do more harm to London’s status as a dealmaking centre than Brexit, and trigger an exodus of wealthy executives to countries with lower taxes.
His warnings were echoed by pre-budget analysis from the Treasury, reported by the Times, which said a tax hike to 45% would have resulted in a “net cost to the exchequer”, draining up to £350m of tax receipts a year.
Labour eventually bowed to the pressure.
Sachdev, who met private equity clients after the budget, said it was “terrific” that the government had “acknowledged the need to safeguard the strength of the UK as a private equity and asset management hub”.
But others said the government could have “gone further”. “I worried that [some of the lobbying] tactics used were a bit heavy-handed”, one manager told the Guardian. Moore said the BVCA had always been “respectful” of the fact that the government needed to “weigh up a whole range of public policy priorities”.
The lawyer Jonathan Blake, who is known as the “father of private equity funds” and helped create the current tax treatment of carried interest in 1987, said it was a “significant” moment for the industry and “clearly more positive than we were expecting”.
“On the other hand, it’s not the end. There’s a consultation period to come, and there’s a possibility of further increase,” he warned.
From 2026, the government plans to treat carried interest as income tax. But it is now trying to determine whether it should give preferential treatment to private equity bosses who put their own money at risk by investing in the funds they manage.
At the moment, few fund managers have skin in the game. According to CenTax, 42% of bosses received carried interest without investing any of their own cash. And just 25% of all carried interest recipients accounted for nearly three-quarters of all co-investment in the UK.
“There will be a lot of negotiations on how to define the difference between investment and income,” said Judith Freedman, Oxford emeritus professor of tax law, and editor of the British Tax Review. “It’s a spectrum, some of these investments are genuinely risky, others look a lot like income. The BVCA just slammed them with international comparisons and evidence and scared the government.”
Moore, for his part, is ready for the next battle. Having already held a post-budget call with Treasury officials, he had been meeting with his membership as it prepares to lobby for the new set of rules that could be unveiled at Reeves’s spring budget. The consultation is open until the end of January.
He said: “Genuinely, this will be a fairly complex picture for us to paint, but it’s on us to collect the data and the analysis, share it with the government in due course. So … while it’s nice to have three months, rather than three and a half weeks, we won’t be short of quite a lot of work to do.”
