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The UK Treasury has warned that Labour’s planned tax raid on private equity chiefs could cost more money than it brings in because of the risk of capital flight.

The department’s analysis estimates that increasing tax paid on “carried interest” — the money buyout executives make on successful deals — risks costing the government as much as £3.3bn if the policy is introduced in 2025 and runs through to the end of 2029. 

In the period between 2025 to 2026, the government will miss out on as much as £900mn in lost tax receipts from those earning carried interest, the report stated. 

The Treasury’s costings suggest a line of attack that the Conservatives will employ when seeking to to undermine Labour in an election campaign expected this year.

Labour officials said the Treasury analysis of their spending plans — which were drawn up on assumptions made by Tory special advisers — “aren’t worth the paper they are written on”.

They pointed out that the Treasury used to claim that reforms to “non-dom” rules would lead to a flight of wealthy people from the UK. But on Wednesday, chancellor Jeremy Hunt adopted one of Labour’s flagship tax policies and abolished the scheme.

The costing itself notes that there are uncertainties in the model, given that it is based on the assumed behavioural response of just 3,000 individuals, and that activities of just a small number of those can have a material impact on total receipts. 

Rachel Reeves, the Labour shadow chancellor, previously committed to applying the top 45 per cent rate of income tax to carried interest. Carried interest — or carry — is currently taxed as a capital gain rather than income, meaning dealmakers pay 28 per cent on it. 

The proposals have prompted some buyout industry executives to warn that if the UK were to begin taxing carry as income then firms and their employees might relocate to European countries with more favourable tax regimes. 

France, Italy and Germany, by comparison, tax carried interest at between 26 per cent and 34 per cent, according to an analysis by law firm Macfarlanes.

Shadow business secretary Jonathan Reynolds told the Financial Times last month that it was “absolutely right” to close the loophole that allowed carried interest to be taxed as capital gains.

But he added: “We will work with the sector on the implementation.” The party is still debating how the new rules should be structured.

“Labour’s plans are based on independent research published by the Resolution Foundation and — unlike the Conservatives — our manifesto will be fully funded and fully costed,” a Labour spokesperson said.

“Jeremy Hunt would be better spent getting Rishi Sunak to confirm the date of the election, rather than putting out any more of these dodgy dossiers.”