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Several British private equity executives and firms may be considering moving operations overseas under proposed tax law changes by the new Labour government.

The new Chancellor of the Exchequer, Rachel Reeves, is understood to want to close a tax loophole that allows private equity fund managers to pay a lower capital gains tax rate of 28% on all profits made, rather than the standard income tax rate of 45%.

This is largely because private equity managers often invest their own money alongside companies and entrepreneurs in the funds, and also accept relatively lower salaries for years until the fund becomes successful enough to pay out large lump sums, often after a few years. Only when profits reach a certain threshold do the managers also receive a share, usually 20%.

However, many companies never reach this stage due to various factors such as economic uncertainty, changing regulations, higher debt and unstable strategies.

Now, Labor’s new tax law could force private equity managers to reconsider how much risk they are prepared to take if long-term payouts are cut. That could make it harder to attract new talent to the industry, and could lead to established managers and funds moving to friendlier overseas markets.

Labour said it expected to make around £565 million (€668.92 million) from implementing the new law, which is set to go towards investing in mental health.

What would the abolition of profit sharing law mean for the UK private equity sector?

As for how the UK private equity sector could change under the new tax rules, Anne Glover, chief executive of venture capitalist Amadeus Capital Partners, told The Telegraph: “It would radically change the economics for everyone who works in it. Instead of working for 10 to 12 years to get a great equity result, alongside entrepreneurs who also get a great equity result, you’re taxed as if it were income, which it isn’t.

“It’s considered globally that it’s properly taxed as a capital gain. So we’d be completely at odds with the rest of Europe and the US if we changed those rules.”

She also pointed out that it is relatively easy for both private equity firms and fund managers to set up operations in other parts of Europe, and even further afield, given that they very often already operate globally.

Over the past few months, an increasing number of UK private equity firms have begun to consider buying property and setting up their businesses overseas.

Some of the destinations being considered include Spain, Italy, Switzerland and Portugal, mainly because of the more favourable tax regimes in those countries. The exodus has also been particularly fuelled by fears that the new Labour government could try to introduce backdating taxes.

What other sectors could change under a Labour government?

Labour has also cracked down on other sectors such as oil and gas, and one of the key promises in its manifesto is plans to boost the use of clean energy in the UK.

As such, the company continues to refine its Green Prosperity Plan, first unveiled in 2021, which aims to provide access to clean energy by 2030.

As we read in the Labour manifesto: “We have huge untapped assets: our long coastline, strong winds, shallow waters, universities and a skilled offshore workforce, as well as our vast technological and engineering capabilities.

“With a serious industrial strategy and a genuine partnership between the public and private sectors, we can make the UK a clean energy superpower.

“The Green Prosperity Plan will be partly funded by a time-limited windfall tax on oil and gas giants making record profits, with the rest of the funding coming from responsible borrowing for investment within Labour’s fiscal framework – catalytic investment that will leverage higher private investment and boost economic growth.”