Labour’s gains in London have private equity looking to exit country

LONDON — With the British parliament back from recess, the UK’s Labour Party will start working to push through aggressive changes, including controversial proposals that would force the rich to pay more in taxes.

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

In June, the Labour Party published its 135-page campaign manifesto. Led by Keir Starmer, the incoming prime minister, Labour vowed to raise $9.4 billion over the next few years through a combination of measures, including closing tax loopholes and slashing other tax breaks. Some of the proposals squarely take aim at the country’s private equity sector, which, despite Britain’s exit from the European Union, has maintained its stature as the regional hub for dealmaking.

“Private equity is the only industry where performance-related pay is treated as capital gains,” the manifesto says. “Labour will close this loophole.”

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

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

“While many established PE professionals will stay in London, new top professionals — of which many will be expats — will be sensitive to a carried interest tax change,” Faeste said. “Many PE professionals have a light anchor and are global citizens, which means they can just leave.”

The Labour Party, which describes itself as “pro-business,” is taking control after winning 412 parliamentary seats of the total 650 in this month’s general election. Though the party has 63% of seats, it won just 34% of the total “popular vote.” Starmer becomes Labour’s first prime minister in 14 years.

Labour’s ascent comes at a precarious time for the private equity sector more broadly. Following years of low interest rates and hefty private market investing, global dealmaking has been on the decline since early 2022, when rates started to jump. Valuations tumbled, but many firms have resisted marking down their assets.

With the potential for higher taxes on the horizon, CNBC spoke to industry executives in London about the proposed rules changes, and whether they would explore an exit to cities in Europe with more advantageous tax regimes.

One executive, who asked not to be named because he wasn’t permitted by his firm to speak on the matter, said he’s considering relocating to Spain after more than five years working in London. That would mean moving his wife and two children, both under the age of 10.

In addition to business-related taxes,…