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LONDON — With the British Parliament back from recess, the U.K.’s Labour Party is gearing up to push through significant changes, including controversial proposals that would increase taxes on the wealthy. Labour’s resounding victory earlier this month has prompted some of London’s elite to consider relocating to more favorable environments elsewhere in Europe.
In June, Labour published a 135-page campaign manifesto outlining plans to raise $9.4 billion through measures such as closing tax loopholes and slashing other tax breaks. Notably, some proposals directly target the private equity sector, which has remained a key player in regional deal-making 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.” This change would tax carried interest, or the profits paid to private equity and hedge fund managers, as income, raising the tax rate to 45% from the current 28% for capital gains.
Lars Faeste, chairman of FTI Consulting’s EMEA team, warned that such changes could lead to a “brain drain over time.” He noted that while many established private equity professionals might stay in London, new top professionals, many of whom are expats, could be deterred by the higher taxes.
The Labour Party, which describes itself as “pro-business,” now controls 412 of the 650 parliamentary seats, despite winning just 34% of the popular vote. Keir Starmer has become Labour’s first prime minister in 14 years, leading the party at a challenging time for the private equity sector. Following years of low interest rates and substantial private market investing, global deal-making has been on the decline since early 2022, when interest rates began to rise.
With potential tax hikes on the horizon, industry executives in London are contemplating moves to European cities with more advantageous tax regimes. One executive, speaking anonymously, said he’s considering relocating to Spain after more than five years in London. The proposed value-added tax (VAT) on private school fees is another factor influencing his decision.
Italy is also emerging as a popular destination. Marco Cerrato, a partner at an Italian tax law firm, reported a “radical increase” in inquiries from British residents seeking advice on Italy’s generous tax breaks for expats. Italy’s €100,000 ($109,000) annual flat tax on income earned abroad, including carried interest, has attracted several hedge funds to Milan.
London’s allure is waning as the U.K. abolishes a tax perk for wealthy, non-domiciled foreign residents, which had helped shield overseas earnings. Mark Veldon, a private equity partner at AlixPartners, noted that there has been some movement to other countries since Brexit, adding that the decision to move will depend on how Labour progresses with its pro-business manifesto.
Since Labour’s landslide win, the party has indicated a potential willingness to make concessions. Rachel Reeves, the new finance chief, told the Financial Times that fund managers risking their own capital might be shielded from the proposed tax changes.
While Labour’s position on growth and investment has been welcomed by business and investors, the party has not yet detailed its plans. This presents a “big opportunity” for the new government to work with industry to create policies that will attract and increase investment in the U.K.
The U.K. needs growth, innovation, and investment to revitalize the economy and finance necessary improvements, according to Faeste. Labour’s early moves, such as unblocking planning restrictions on data centers and bringing wind farms to the country, are positive signs that the country is “open for business.”
However, the new government faces challenges, including the country’s hefty debt level, which will initially constrain government investment. The next few years will be critical in determining the U.K.’s status in the European business community. Delivering quick wins and improving relationships with Europe and the U.S. will be crucial for maintaining the U.K.’s position as a business hub.