LONDON — With the British Parliament Return from breakThe UK Labour Party will launch an initiative to push for positive reforms, including some controversial reforms. suggestion It would force the wealthy to pay more taxes.
The Labour Party won a landslide victory earlier this month, and now, as party leaders prepare to deliver on their election pledges, some of London’s elite are planning to leave the capital and move across the English Channel to friendlier parts of Europe.
In June, the Labour Party issued a 135-page Election ManifestoCurrent Prime Minister Keir Starmer’s Labour party has pledged to raise $9.4 billion over the next few years through a range of measures, including closing tax loopholes and slashing other tax breaks.Some of the proposals are aimed squarely at Britain’s private equity sector, which has maintained its position as a regional hub for deals despite Brexit.
“Private equity is the only industry where performance-related pay is treated as capital gains,” the manifesto states. “Labour will close this loophole.”
In practice, this would mean taxing carried interest – the profits paid to private equity and hedge fund managers – as income, with the tax rate jumping to 45% from the 28% paid on capital gains.
Lars Faeste, chairman of FTI Consulting’s EMEA team, said such changes would lead to a “talent exodus in the long term”.
“Many established PE professionals will remain in London, but the new top professionals, many of whom are expatriates, will be sensitive to the changes to carried interest taxation,” Faeste says. “Many PE professionals have lighter anchors and are global citizens, which is why they can easily leave.”
The self-described “pro-business” Labour party came to power in this month’s general election, winning 412 of the 650 seats available. The party won 63 percent of the seats but just 34 percent of the total “popular vote”. Starmer is the first Labour prime minister in 14 years.
Labor’s rise comes at a volatile time for the private equity industry as a whole. After years of low interest rates and heavy private market investment, global deals have been declining since the start of 2022 as interest rates began to spike. Valuations have fallen, but many companies are resisting writedowns on their assets.
With the prospect of tax hikes growing, CNBC spoke to industry executives in London about the proposed rule changes and whether they would consider a retreat to European cities with more favorable tax regimes.
One executive, who spoke on condition of anonymity because he was not authorized by the company to discuss the matter, said he was considering moving to Spain after more than five years working in London, which would mean relocating his wife and two children under 10.
He said Labour’s plans to introduce a value-added tax (VAT) on private school tuition fees, as well as business-related taxes, were also reasons he was considering the move.
Another popular travel destination is Italy.
Marco Cerrato, a partner at an Italian law firm specializing in tax law, said he has seen a “surge” in the number of inquiries in the past six months from British residents seeking advice on how to qualify for Italy’s generous tax breaks for expats. Italy imposes a flat tax of 100,000 euros ($109,000) a year on income earned abroad, including carried interest.
The flat tax, introduced in 2017, remains in place even as Prime Minister Giorgia Meloni cuts some incentives for foreigners moving to Italy for work.
“The flat tax rate remains unchanged even in the major tax reform enacted by the current administration this year,” Cerrato said.
Serrato said 4,000 people have moved to Italy since the flat tax was introduced seven years ago. Capstone Investment Advisors, Steve Cohen’s Point72 Asset Management and Eisler Capital are some of the hedge funds that have recently moved to Italy. Opened a store in MilanItaly’s financial centre, Hong Kong, is growing thanks to the country’s favourable tax regime.
London has lost its luster
FTI’s Faeste said Milan’s success in attracting talent was due in part to the country’s many attractions.
The increased interest from British companies also coincides with Britain’s decision to scrap tax breaks for wealthy non-resident expats that help them hide earnings overseas.
“London has long been the pulpit for European financial services, private equity and investors,” said Mark Beldon, a private equity partner at financial advisory and global consulting firm AlixPartners, “but since Brexit we’ve seen a move to other countries.”
“People are moving around more than ever before,” Mr Beldon said, adding that for many people, their decisions on whether to move “will depend on how well the Labour government pushes through its pro-business manifesto”.
Since Labor’s landslide victory, the party has signalled it is willing to make concessions, and there is some optimism in the investment community.
in Financial Times interviewRachel Reeves, now chief financial officer, suggested fund managers putting their own capital at risk may not be affected by the proposed tax changes.
“I don’t think it’s right that what is effectively a bonus should be taxed at a lower rate than a salary when you’re not putting any of your own capital at risk,” Reeves told the Financial Times. “If you are putting your own capital at risk, then it’s appropriate that you should be paying capital gains tax.”
AlixPartners’ Beldon said there were encouraging signs that Labor was “prepared to back pro-business policies, with a commitment to fully consult with business leaders and investors”.
“Overall, Labor’s positions on growth and investment have been welcomed by businesses and investors across the board,” Mr Beldon added.
He also said the party had not set out detailed plans on which to base its manifesto, saying this would present a “huge opportunity” for the new government to work with business to develop policies that would attract and increase investment to the UK.
FTI Consulting’s Faeste echoed similar sentiments.
“The UK needs growth, innovation and investment to revitalise, lift our economy and fund all the improvements we need,” he said. “This requires a dynamic business environment and so far the Labour government seems fully aligned with that strategy.”
Mike O’Sullivan, former chief investment officer for Credit Suisse’s international asset management division, agreed that Labor’s discussions with the private equity industry showed an openness to feedback and negotiation.
“This will change the political situation to one that is much calmer and less predictable than before,” he said, adding that the government aims to “bring some degree of calm and stability.”
Beyond taxes, O’Sullivan said he was encouraged by Labor’s early efforts to remove planning restrictions on data centers and attract wind farms. Mr O’Sullivan, who is chief economist at Moonfare, a digital investment platform that secures investments for private equity and venture capital funds, said these were signs the country was “open for business”.
One of Labor’s key pledges is to create a national energy company.
But the new government needs to act quickly. The biggest obstacle is the country’s high debt levels, which “will initially limit government investment, particularly in the green economy,” O’Sullivan said.
Paul Hale, global head of tax at the U.K.-based Alternative Investment Management Association, said the government knows it needs private investment to grow the economy fast. He said Labour “must nurture the tax base so that revenues keep flowing in.”
Beldon said the next few years would be crucial in determining the UK’s position in Europe’s business world.
“The UK has broadly maintained its position since Brexit, despite more competition and more challenging markets,” Beldon said. “But trust in the political system, the economy and the business environment is fragile, so it will be important that Labour delivers quickly. Labour’s renewed focus on the UK’s relationships with Europe and the US will also help maintain the UK’s position as a business stronghold.”
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