View of the Palace of Westminster and Big Ben on July 3, 2024, London, the day before the general election.
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London—with the British Parliament Back from recessthe UK Labor Party will begin its push for radical change, including the controversial proposal This will force the rich to pay more taxes.
Earlier this month, Labor scored a landslide victory. Now, as party leaders prepare to deliver on their campaign promises, some of London’s elite are plotting to flee town and across the English Channel to what they consider friendlier parts of Europe elsewhere.
In June, Labor published a 135-page report election manifesto. Led by incoming Labor Prime Minister Keir Starmer Vows to raise $9.4 billion over next few years Through a combination of measures, including closing tax loopholes and cutting other tax breaks. Some of the proposals directly target the country’s private equity industry, which has maintained its status as a regional deal hub despite Britain’s exit from the European Union.
“Private equity is the only industry that treats performance-related pay as capital gains,” the manifesto reads. “Labour will close this loophole.”
In practice, this means that profits carried on interest or payments to private equity and hedge fund managers are taxed as income. The capital gains tax rate will soar from 28% to 45%.
Lars Faeste, chairman of FTI Consulting’s Europe, Middle East and Africa team, said such changes would lead to “a brain drain over time.”
“While many established private equity professionals will remain in London, new top professionals, many of whom will be expatriates, will be sensitive to changes in carried interest tax,” Feist said. “Many private equity professionals are Having light anchors and being a global citizen means they can leave.”
The self-proclaimed “pro-business” Labor Party is on track to seize control after winning 412 of the 650 parliamentary seats in this month’s parliamentary election. popular suffrage. Although the party held 63% of the seats, it won only 34% of the total “popular vote”. Starmer becomes Labour’s first Prime Minister in 14 years.
Labour’s rise comes at a time of wider instability for the private equity industry. Global transaction volumes have been declining since rates began surging in early 2022 after years of low interest rates and heavy private market investment. Valuations plummeted, but many companies refused to write down assets.
With the possibility of higher taxes, CNBC spoke with industry executives in London about the proposed rule changes and whether they will explore exiting European cities with more favorable tax regimes.
One senior executive, who asked not to be identified because the company did not allow him to speak for the matter, said he was considering moving to Spain after more than five years in London. This means his wife and two children are under 10 years old.
He said Labor’s plans to impose value-added tax (VAT) on private school fees, in addition to business-related taxes, had prompted him to consider action.
Another popular destination is Italy.
Marco Cerrato, a partner at an Italian firm specializing in tax law, said he had seen a “dramatic increase” in the past six months in the number of inquiries from UK residents seeking to access Italy’s tax generosity Recommendations for eligibility for exemptions. The country levies a flat tax of 100,000 euros ($109,000) per year on foreign income, including carried interest.
The flat tax introduced in 2017 remains in effect despite Prime Minister Giorgia Meloni cutting some incentives for foreigners moving to Italy to work.
“Even with the wide-ranging tax reforms implemented by the current administration this year, the flat tax system has remained unchanged,” Serrato said.
Serrato said 4,000 people had immigrated to Italy since the introduction of the flat tax system seven years ago. Hedge funds such as Capstone Investment Advisors, Steve Cohen’s Point72 Asset Management and Eisler Capital have recently Open store in MilanItaly’s financial center benefits from the country’s favorable tax system.
London loses its luster
FTI’s Feist said part of the reason Milan attracts top talent is because the country has many attractions.
The surge in interest from British companies also coincides with Britain’s decision to scrap tax breaks for wealthy non-domiciled foreign residents that had helped them protect their overseas earnings.
“London has long been the forum for financial services, private equity and investors in Europe,” said Mark Veldon, private equity partner at financial advisory and global advisory firm AlixPartners. “However, since Brexit we have seen some movement towards Transfer trends in other countries.”
Weldon added that “people are more mobile now” and the decision many people make about whether to move will “depend on how far the Labor government goes with its pro-business manifesto”.
Since Labour’s landslide victory, the party has shown signs of a potential willingness to concede. Some in the investment community are optimistic.
in a Interviewed by the Financial TimesFund managers who risk their own capital may be protected from the impact of proposed tax changes, incoming treasurer Rachel Reeves said.
“I think it’s not right that what is essentially a bonus is taxed at a lower rate than employment income when you’re not putting your own capital at risk,” Reeves told the Financial Times. “If you It is appropriate to pay capital gains tax if you are putting your own capital at risk.”
AlixPartners’ Veldon said there were encouraging signs that Labor “is willing to support its pro-business agenda and is committed to full consultation with business leaders and investors.”
Weldon added: “Overall, Labour’s stance on growth and investment has been generally welcomed by businesses and investors.”
He also said the party had yet to put forward detailed plans to support its manifesto, which presented a “huge opportunity” for the new government to work with industry on policies to attract and increase investment in the UK.
FTI Consulting’s Faeste echoed this sentiment.
“The UK needs growth, innovation and investment to rejuvenate, upgrade the economy and pay for all the necessary improvements,” he said. “This requires a vibrant business environment and so far the Labor government appears to have fully adapted to this strategy.”
Mike O’Sullivan, formerly chief investment officer of Credit Suisse’s international wealth management unit, also believes that Labor’s discussions with the private equity community show that Labor is open to feedback and negotiation.
“This makes the political atmosphere less hostile and unpredictable,” he said, adding that the government’s goal was to “provide a degree of calm and stability.”
Taxes aside, O’Sullivan said he was encouraged by Labor’s early moves to lift restrictions on data center planning and bring wind farms into the country. O’Sullivan is currently chief economist at Moonfare, a digital investment platform that secures allocations to private equity and venture capital funds.
One of Labour’s key promises is the creation of a publicly owned energy company.
But the new government needs to act quickly. O’Sullivan said the biggest obstacle was the country’s heavy debt levels, which “will initially limit government investment, particularly in the green economy”.
AIMA’s Hale said the government knew it needed private investment to grow the economy quickly. He said Labor “has to nurture the tax base so the revenue keeps flowing in.”
Weldon said the next few years would be crucial in defining Britain’s place in Europe’s business community.
“Despite increased competition and market challenges since Brexit, the UK has largely retained its throne,” Weldon said. “However, trust in the political system, the economy and the business environment is fragile, so Labor Winning some quick wins is crucial, and their renewed focus on Britain’s relationships with Europe and the United States may also help maintain Britain’s status as a home for business.
