Labor’s gains in London have private equity seeking an exit from the country

LONDON — With the British Parliament back after the breakThe UK Labor Party will begin work to push through aggressive changes, including controversial suggestions which would force the rich to pay more taxes.

Labor won a resounding victory earlier this month. Now, as party leaders prepare to make good on their campaign promises, some of London’s elite are planning to skip the city and cross the Channel for what they see as friendlier pastures elsewhere in Europe.

In June, the Labor Party published its 135-page manifesto election manifesto. Led by Keir Starmer, who is now prime minister, Labor has promised to raise $9.4 billion over the next few years through a combination of measures, including closing tax loopholes and cutting other tax breaks. Some of the proposals are clearly aimed at the country’s private equity sector, which, despite Britain’s exit from the European Union, has retained its stature as a regional hub for deal-making.

“Private equity is the only industry where performance-related fees are treated as capital gains,” the manifesto states. “Labour will close this gap.”

In practice, this would mean taxing carried interest or profits paid to private equity and hedge fund managers as income. The tax rate will rise to 45% from the 28% paid on capital gains.

Lars Faeste, head of FTI Consulting’s EMEA group, said such changes would lead to a “brain drain over time”.

“While many established PE professionals will remain in London, new top professionals – many of whom will be expats – will be sensitive to a rate tax change,” Faeste said. “A lot of PE professionals have a light anchor and are global citizens, which means they can just walk away.”

The self-proclaimed “pro-business” Labor Party is taking control after winning 412 out of 650 parliamentary seats in this month’s general election. Although the party has 63% of the seats, it won only 34% of the total “popular vote”. Starmer became the first Labor prime minister in 14 years.

Labour’s rise comes at a precarious time for the private equity sector more broadly. After years of low interest rates and huge investments in the private market, global transactions have been in decline since early 2022 when interest rates started to rise. Valuations tumbled, but many companies resisted shedding assets.

With the possibility of higher taxes on the horizon, CNBC spoke with industry executives in London about the proposed rule changes and whether they would explore an exit to cities in Europe with more favorable tax regimes.

One executive, who asked not to be named because his company did not allow him to speak on the matter, said he was considering relocating to Spain after more than five years working in London. That would mean moving his wife and two children, both under 10 years old.

As well as business-related taxes, he said Labour’s plan to introduce value-added tax (VAT) on private school fees has him considering a move.

Another popular destination is Italy.

Marco Cerrato, a partner at an Italian firm specializing in tax law, says that over the past six months, he has seen a “radical increase” in the number of inquiries from British residents seeking advice on how to qualify for the generous tax credits. Italy’s reliefs for expats. The country has an annual flat tax of 100,000 euros ($109,000) on income earned abroad, including carried interest.

Although Prime Minister Giorgia Meloni is eliminating some incentives for foreign nationals relocating to Italy for work, the flat tax, implemented in 2017, remains in place.

“The single tax regime has always remained unchanged even in the case of the broad tax reform implemented this year by the current government,” Cerrato said.

Cerrato said 4,000 people have moved to Italy since the single tax was introduced seven years ago. Capstone Investment Advisors, Steve Cohen’s Point72 Asset Management and Eisler Capital are among the hedge funds that recently opened a store in Milanthe financial center of Italy, thanks to the country’s favorable tax regime.

In one interview in the Financial Timesincoming finance chief Rachel Reeves said fund managers risking their own funds may be protected by the proposed tax change.

“I don’t think it’s right … what is essentially a bonus should be taxed at a lower rate than employment income when you’re not putting your own capital at risk,” Reeves told the FT. “If you are putting your own capital at risk, it is appropriate to pay capital gains tax.”

AlixPartners’ Veldon said there were encouraging signs that Labor was “keen to support its pro-business agenda with a commitment to fully consult with business leaders and investors”.

Weldon added: “Broadly, Labour’s position on growth and investment has been welcomed by business and investors in general.”

He also said the party had not presented detailed plans to underpin its manifesto, which is a “big opportunity” for the new government to work with industry to create policies that will attract and increase investment in the UK.

Faeste from FTI Consulting echoed that sentiment.

“The UK needs growth, innovation and investment to get its mojo back and upgrade the economy and pay for all the improvements that are needed,” he said. “This will require a dynamic business environment and so far it appears that the Labor government is fully on board with this strategy.”

Mike O’Sullivan, who previously served as chief investment officer at Credit Suisse’s international wealth management division, agrees that Labor’s discussions with the private equity community show there is an openness to feedback and negotiation.

“It changes the political climate to a much less vicious, unpredictable one,” he said, adding that the government aims to “provide a level of calm and stability.”

Taxes aside, O’Sullivan said he was encouraged by Labor’s early moves to lift planning restrictions on data centers and bring wind farms across the country. O’Sullivan, who is currently chief economist for Moonfare, a digital investment platform that secures allocations to private equity and venture capital, said these were signs that the country was “open for business”.

One of Labour’s flagship pledges is the creation of a public energy company.

But the new government must move quickly. The biggest obstacle is the country’s high level of debt, which “will initially limit government investment, particularly in the green economy,” O’Sullivan said.

AIMA’s Hale said the government knows it needs private investment to grow the economy quickly. He says Labor “needs to grow the tax base so the revenue keeps flowing in”.

Veldon says the next few years will be critical in defining the UK’s place in the European business community.

“The UK has largely retained its crown despite the increased competition and market challenges seen post-Brexit,” Weldon said. “However, confidence in the political system, economic and business environment is fragile, so it will be critical for Labor to get some quick wins and its renewed focus on the UK’s relationship with Europe and the US will likely help to maintain position of the United Kingdom. as a home for the business community.”

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