Labour plans to raise £500m by closing fund managers' tax loophole

Labour has announced plans to raise almost £500m by closing a tax loophole enjoyed by a small number of private equity fund managers.

The shadow chancellor, Rachel Reeves, said the proposal was one example of how a Labour government would “start to end the unfairness in the tax system” by ensuring that the wealthy do not avoid tax while ordinary workers are being asked to pay more in national insurance.

Although the sums involved from the proposed rule change on “carried interest” are relatively modest compared with the amount raised by other government taxes, Labour cites this is evidence that there are alternatives to the Tory plan to raise £12bn a year from a national insurance hike.

Labour was criticised for opposing the increase – dubbed the health and social care levy – without being able to give details of an alternative plan to raise money for the sector. At the time Reeves said that other sources of income could have been taxed instead, but she was not specific about which of them Labour would target.

On Sunday Reeves said Labour could raise up to £440m a year by closing the carried interest loophole. It said it would urge the government to do this in the forthcoming budget, but that a Labour government would implement the measure itself if the Tories refused.

Carried interest refers to the share of profits made by private equity fund managers from an investment deal that they have put together. It is taxed at the capital gains tax rate instead of at the income tax rate, which generally means people paying 28% tax instead of 45% tax.

Only about 2,000 people receive carried interest income a year, but on average the sums involved are £1m.

Related: Boris Johnson squeezes working people in national insurance hike

Labour believes carried interest should be taxed as income because it is effectively a fee for management, rather than a capital gain. The party says it is common for private equity managers to contribute just 1-3% to the capital of the fund they have put together, but for them to get 20% of the profits.

The party also believes that closing this tax loophole will also reduce the incentive for private equity to engage in asset stripping. It says nearly 60% of big retailers that went into administration between 2010 and 2019 were linked to a private equity takeover.

Reeves said: “Instead of hitting working people and businesses with tax rises, we should be spreading the burden and creating a fairer system. It’s absurd that the current regime around carried interest means tax breaks for fund managers averaging £170,000 per person.

“It’s not right that working people and ordinary businesses have been hit by a jobs tax, while private equity fund managers don’t have to pay a penny more on their income, and are in fact handed a tax break by this government as they asset strip some of our most valued businesses.”

Speaking in the Commons on the day MPs approved the £12bn national insurance hike in principle, Reeves said income from property rental and sales, income from stocks and shares, and income from inheritance were all examples of alternative forms of income that could be taxed more heavily as an alternative to what the government was doing.

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