A Labour government would allow private equity dealers to tax their profits at a lower rate when their own money is at stake, Shadow Chancellor Rachel Reeves said, a move that was welcomed by the industry today.

In its manifesto last week, Labour confirmed plans to scrap a tax break for private equity fund managers that allows them to pay a lower rate of capital gains tax on a portion of their investment profits (known as carried interest) rather than the higher rate of income tax.

The move has unsettled the UK buyout industry and sparked fears that it could trigger an exodus to countries where carried interest is still taxed at the lower capital gains rate. The so-called “carry” is one of the main ways for fund managers to make money, as it allows them to share in the profits when an asset is sold.

However, Reeves today sought to draw a distinction in the plans, claiming that fund managers should only pay the income tax rate if they had not invested their own capital.

“I don’t think it’s right that something that is essentially a bonus should be taxed at a lower rate than employment income when you’re not putting your own capital at risk,” she told the Financial Times.

“If you are putting your own capital at risk, it is appropriate that you pay capital gains tax,” she added.

Fund managers typically invest around one percent of their fund’s total capital, meaning they could still benefit from a tax break on profits. However, Reeves clarified that most carried interest in the UK would likely continue to be taxed as income under Labour’s plans.

The comments may allay some fears among senior private equity figures about the impact of the planned crackdown, which is expected to raise about £565 million in tax revenue for the Labour Party. Industry body the British Private Equity and Venture Capital Association, which has urged Reeves to back down from the measure, welcomed the shadow chancellor’s comments and said it was vital that the UK remained “internationally competitive”.

“The shadow chancellor’s clarifications are an encouraging signal that Labour is prepared to back up its pro-business sentiment with substantive commitment. However, it is important that, if elected, Labour honours its commitment to consult widely with industry, given the impact its proposals could have on growth and investment in the UK,” said Michael Moore, chief executive of the BVCA, in a statement.

Labour’s carried interest plans have been one of the points of friction in a major charm offensive in the City and the financial services sector over the past two years.

In a report by investment bank Investec earlier this year, around 30 percent of respondents said they would move their residence outside the UK if the carry tax rate was increased, around 42 percent said nothing would change, while five percent said they would change jobs completely.

According to a new study by Ludovic Phalippou, professor at Oxford’s Said School of Business, the world’s largest buyout firms, venture capital funds and infrastructure investors have earned more than $1 trillion (£780 billion) in carried interest compensation since 2000.