Labour is poised to U-turn on plans to tax investors after discovering the policy could have a “net cost to the exchequer”, according to reports.
In its manifesto, the party pledged to stop private equity investors from paying capital gains tax rates of 28 per cent on the money they make, and instead force them to pay 45 per cent income tax rates.
Sir Keir Starmer claimed the policy could raise £560 million but investment firms warned it could backfire and drive millions of pounds out of the UK to save it from the tax grab.
Further analysis by the Government has now come to a similar conclusion, it is understood, suggesting the policy could cost the Treasury hundreds of millions of pounds a year instead of raising any money.
The analysis, carried out by the Treasury, found it would incur a “net cost to the exchequer” of as much as £350 million a year after five years.
This was because wealthy individuals were more likely to leave the UK than pay the higher rates, The Times reported.
A Government source told the newspaper: “We are absolutely in the revenue-raising maximising space rather than doing things for ideological reasons.”
In June, before Labour came to power, Rachel Reeves, then shadow chancellor, told the Financial Times: “I don’t think it is right that … what is essentially a bonus is taxed at a lower rate than employment income”.
The Chancellor did also say the Government would exempt private equity bosses who risked their own capital.
The tax break has allowed private equity fund managers to pay capital gains tax on some of their profits, rather than the higher rate of income tax, for decades.
Called “carried interest”, the tax loophole has seen firms earn more than £780 billion since 2000, according to a paper by Ludovic Phalippou, an Oxford School of Business professor.
Earlier this year, a report by investment bank Investec warned that nearly a third of private equity investors would relocate outside of the country if Labour’s tax policy went ahead.
The Government’s U-turn on taxing investors follows a similar decision by Ms Reeves to soften promises of a crackdown on non-doms.
Last month, it emerged the Chancellor was considering abandoning her pledge to abolish non-dom status altogether over fears it may fail to raise any money.
Labour had pledged to end the tax perk for wealthy residents who are domiciled overseas in its manifesto, hoping the policy would raise £1 billion a year.
