Rachel Reeves spares PE bosses the top UK tax rate as part of a compromise over ‘loopholes’

Rachel Reeves is unlikely to hit the private equity industry with the 45p top tax rate this month, because she’s looking for to find a compromise deal to close the tax “loopholes”, which doesn’t drive investors away from Britain. Reeves said that she will not be “ideological”, about taxing wealthy people, ahead of the international investment summit to be held in London next month. Insiders in the government said that she was seeking a “compromise”, aimed at raising money, but not to such an extent as to harm Britain’s ability compete.

Reeves said in a Friday interview that “we are approaching this responsibly and we need make sure we don’t reduce investment in Britain.” Private equity managers receive part of their compensation through carried interest. This means that if the funds they manage achieve higher returns than a set level, they will get a share of those profits. In the UK this tax is levied at 28 percent as a capital gains, rather than income which carries a 45 percent top rate plus national insurance.

An insider in the government noted that Labour’s election manifesto committed Reeves only to closing tax loopholes and not to a 45 percent tax rate. One insider said that there will be a deal on this. Labour’s electoral programme stated: “Private Equity is the only sector where performance-related compensation is treated as capital gain. Labour will close the loophole. The party intended to raise £565mn per year by taking such actions and has been consulting with the industry.

In June before the election the chancellor said that Labour would maintain the UK’s favorable tax treatment for private equity executives when fund managers place their own capital on the line.

She said that UK private equity chiefs invest only “tiny amounts” of their capital. The amounts are “lower” than what many other countries need to qualify for tax benefits. Michael Moore, Chief executive of the British Private Equity and Venture Capital Association (BPEVCA), said that it is vital for any new regime to be “internationally competitive”. According to industry sources, if the tax rate on carried interest rises above “low 30s”, Britain may start losing out to other jurisdictions, such as the US, Italy or Spain.

The Treasury declined comment on tax speculation, but stated: “We are dedicated to reforming tax treatment of carried interests. We will deliver fairness in this aspect of the tax system and recognise the vital role our world-leading industry of asset management plays in channeling investment throughout the UK.”

Reeves, and Sir Keir, the Prime Minister, will roll out the carpet for investors on October 14, at a London Summit, but they are under pressure from their guests to assure them that the Budget, on October 30, will not be hitting them with major tax increases. Some business leaders have criticised its timing. Some business figures have criticised the timing of the event.

Those close to the event claim that it has been “completely oversubscribed”, and CEOs have been turned away. Goldman Sachs CEO David Solomon is expected to attend, as well as former Google CEO Eric Schmidt and Larry Fink, chairman and chief executive officer of BlackRock. Helge Lound, chairwoman of Novo Nordisk, will also be in attendance.

Reeves stated: “Heathrow will have to expand its VIP section by the middle of October in order to accommodate the high net worth individuals who are coming to the United States that week. We are very excited by the quality of the people and the money that they manage.”

A person who was familiar with the airport’s preparations stated that the airport had been preparing for a large number of visitors to its VIP suite. This would require additional staff and adequate food and drinks.

The Treasury has denied a report that appeared in the Observer, claiming Reeves would delay the end of tax incentives for private schools. A spokesman confirmed that the tax breaks would be implemented on January 1, as planned.