Marco Cerrato, a partner at Maisto e Associati, has seen his Italian tax-law firm field more phone calls than ever in recent weeks from London’s wealthy private equity (PE) fund managers nervously plotting an escape to Milan.

The trigger for their growing anxiety is the prospect of paying a higher tax on their main source of compensation - the so-called carried interest, or the portion of investment returns shared between PE fund managers. Considered capital gains, those earnings are taxed at 28% under the current regime. Britain’s Labour Party - poised to win Thursday’s election - has pledged to take a tougher approach, which could mean treating them as income at a tax rate as high as 45%.

Top City executives in London, who didn’t want to be identified discussing internal matters, said there’s been plenty of dialogue with PE managers and also wealthy clients about potential alternatives, with Milan figuring in the top. Many legal firms in Italy, like Cerrato’s, said separately that they have been dealing with a surge in the number of inquiries from PE managers about Milan.

“We are trying to deploy as much resources as we can” to deal with the calls, said Cerrato, who helps clients relocate to Italy. With opinion polls pointing to a landslide win for Labour, its campaign promise targeting PEs is “fuelling concerns” of more taxes on the rich, Cerrato added.

Milan has already been attracting several investment firms including Capstone Investment Advisors, Eisler Capital, Certares Management and billionaire Steve Cohen’s Point72 Asset Management, which have been setting up offices there. A UK tax move on carried interest will bring an influx of more PE managers, Cerrato said.

The tax proposal, coming on the back of the UK’s decision to scrap preferential tax treatment for rich “non-domiciled” foreign residents starting April 2025, has spooked London’s buyout firms, which are already under pressure due to a protracted worldwide slump in dealmaking.

While it’s too early to say whether these inquiries will translate into an exodus from London, they highlight the emergence of Milan as a top pick for the world’s wealthy seeking to take advantage of Italy’s expat-friendly tax breaks and its relatively more stable government.

They also show how elections across Europe, political uncertainties and threats of higher taxation on the rich are diminishing the appeal of the continent’s finance hubs, including Paris and Frankfurt, which earlier benefited from Brexit.

Paris was “the obvious best alternative to London when Brexit broke” but is now experiencing significant uncertainty amid snap elections, said Carlo Alberto Carnevale Maffe, who teaches business strategy at Milan’s Bocconi University. But now, “Italy is the country with the highest political stability in Europe, with elections done years ago, and a stable government that doesn’t lean any further right.”

Italy’s biggest attraction is the €100,000 annual flat tax on income earned abroad. Though Prime Minister Giorgia Meloni’s government has trimmed some of the earlier incentives for workers moving to Italy, it has retained the flat rate.  

Tax isn’t the only consideration. City of London executives say schooling, safety and other lifestyle factors are also being taken into account. And Milan is one of many destinations being weighed: Dubai, Switzerland and Greece have also come up in the discussions.

For its part, Milan has been burnishing its image over the years, having undergone somewhat of a renaissance. Several urban revitalisation projects have helped transform dilapidated neighbourhoods into contemporary landmarks. Home to new international schools, members-only social clubs and posh restaurants, it is also just hours away from attractions such as seaside towns, lakes and Alpine ski resorts.

Since Italy introduced the flat tax in 2017, about 4,000 people have moved to the country. That number could jump 50% to 6,000 in the next year, according to Cerrato.

He isn’t alone in predicting an influx of foreign workers into Milan. Christian Montinari, partner and head of tax practice at DLA Piper in Italy, said the number of calls his firm receives from people considering a move to Italy has jumped 30% this year. He calls it a “new migration” driven by changes expected in UK tax laws.

Livio Bossotto and Francesco Guelfi, partners at A&O Shearman in Milan, said that a flood of inquiries from rich Londoners started months ago after the government earlier this year decided to abolish a system that allowed non-domiciled residents to avoid paying UK tax on overseas earnings for as long as 15 years.

The Labour Party’s PE proposal has only added to the jitters, Guelfi said, adding the calls about Milan are coming mostly from mid-sized firms that have more flexibility to move from London.

The last time countries in continental Europe managed to lure wealthy finance workers from London was in the aftermath of Brexit, though they had mixed results with their tax breaks and other perks.

Paris and Frankfurt benefited the most from the exodus, while Milan - in some ways a less international city - saw just a trickle. Those coming in were mostly Italian nationals wanting to move closer to their families.

But that’s set to change on account of the recent political turmoil in France and Germany.

French President Emmanuel Macron’s decision to call for a snap election, which has seen a surge in voter support for his far-right and leftist opponents in the first round of voting, has roiled the country’s financial markets. German Chancellor Olaf Scholz’s ruling coalition is also facing trouble from the far-right, with business leaders including Deutsche Bank AG chief executive officer Christian Sewing blaming the Alternative for Germany party for contributing to declining investments in Europe’s largest economy.

Speaking of France’s political challenges, Carnevale, the professor at Bocconi University, said far-right nationalists could threaten professional mobility with immigration controls while leftists could impose higher taxes on the rich.

“If these threats materialise, there is a risk of interrupting the flow of investments and relocations in France seen after Brexit,” said Carnevale. “If so, the second-best option is Milan.”

The Italian tax structure could especially be tempting for PE fund managers, whose compensations are linked to dividends and capital gains. While their salaries are fixed and subject to full local taxation, in times of rising valuations, they can earn several millions from capital gains from the transactions they work on. They also lead to eye-popping bonuses for staff who can buy into the fund, creating a new class of multimillionaires. Those huge payouts rarely make it into the public domain.

These earnings attracted the attention of the UK’s Labour Party back in 2021, when Shadow Chancellor Rachel Reeves said she would target tax loopholes benefiting the PE industry. But full details of the plan haven’t been discussed yet. Last month, she signalled PE managers putting their own capital at risk will be exempt from the proposed higher tax and reiterated that the party would consult on the changes if elected.

During the unveiling of Labour’s election manifesto on June 13, the party’s leader Keir Starmer - who’s likely to succeed Rishi Sunak as prime minister - said he’s “absolutely determined” to make the change.

Labour says the higher tax on carried interest at PEs would help raise £565 million annually, to be spent on adding mental-health staff in the National Health Service, legal aid for disaster victims and the waiving of visa costs for non-UK veterans who served in the British military.

But if Labour has been taking great pains to showcase its credentials as a business-friendly party with its stated “number one mission” being wealth creation, then the proposed tax will be another difficulty in selling the UK, said Paul Hale, global head of tax affairs at London-based Alternative Investment Management Association.

“You will have this negative aspect that previous tax advantages no longer exist and that somewhere else may offer something that is better in that regard,” Hale said.

  - Bloomberg