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Tax change targets private equity Capital gains tax relief scrapped
(10 minutes later)
The chancellor has scrapped capital gains tax taper relief, a measure designed to hit private equity chiefs. Business groups have complained about the chancellor's decision to scrap capital gains tax taper relief.
Different rates of relief for different kinds of investment will be replaced with a single flat tax rate of 18%.Different rates of relief for different kinds of investment will be replaced with a single flat tax rate of 18%.
Alistair Darling said the measure would mean that private equity chiefs pay fairer taxes.
Other businesses have said they will be hit with higher rates of Capital Gains Tax and this would be a disincentive to invest in new assets.
The new rules come into force in April 2008.
John Pierce, chief executive of the Quoted Companies Alliance, said: "We are very disappointed that the taper relief that has been in place for some while to encourage investment in smaller growing businesses has been removed.
"This is further evidence that rather than supporting smaller growing companies, the government are hemming them in," he added.
Tax break
Private equity bosses previously paid a lower rate of just 10% on their profits when they sold a company, as long as they had held the firm for two years.Private equity bosses previously paid a lower rate of just 10% on their profits when they sold a company, as long as they had held the firm for two years.
Critics, including unions, have argued that this taper relief gave private equity an unfair tax break.Critics, including unions, have argued that this taper relief gave private equity an unfair tax break.
READ THE REPORT Pre-Budget Report and Comprehensive Spending Review 2007 in full [1.5MB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here See documents and speech in fullREAD THE REPORT Pre-Budget Report and Comprehensive Spending Review 2007 in full [1.5MB] Most computers will open this document automatically, but you may need Adobe Reader Download the reader here See documents and speech in full
Chancellor Alistair Darling said: "I can tell the House the changes I propose to capital gains tax also, taken together with the tax loopholes that I am closing, will ensure that those working in private equity pay a fairer share."Chancellor Alistair Darling said: "I can tell the House the changes I propose to capital gains tax also, taken together with the tax loopholes that I am closing, will ensure that those working in private equity pay a fairer share."
Today's changes will please the unions who have been campaigning for tougher tax treatment for private equity partners.Today's changes will please the unions who have been campaigning for tougher tax treatment for private equity partners.
PRIVATE EQUITY TAX Executives pay full income tax on basic pay and bonusesMost of their profit will come from the 20% slice of profit they typically make from selling a businessThis is taxed as a capital gain and gets a generous form of taper relief which reduces tax to 10%. From April, this gain will be now be taxed at 18%PRIVATE EQUITY TAX Executives pay full income tax on basic pay and bonusesMost of their profit will come from the 20% slice of profit they typically make from selling a businessThis is taxed as a capital gain and gets a generous form of taper relief which reduces tax to 10%. From April, this gain will be now be taxed at 18%
Some of the industry's best performers have become multi-millionaires by buying companies using debt and investors' money and selling the companies at a profit a few years later.Some of the industry's best performers have become multi-millionaires by buying companies using debt and investors' money and selling the companies at a profit a few years later.
"We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognised for the contribution it makes to pension funds and the wider economy," said Simon Walker, chief executive designate of the British Venture Capital Association."We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognised for the contribution it makes to pension funds and the wider economy," said Simon Walker, chief executive designate of the British Venture Capital Association.
Small businesses Gainers
Today's abolition of capital gains tax relief will also hit other businesses that buy and sell assets.
John Pierce, chief executive of the Quoted Companies Alliance, said: "We are very disappointed that the taper relief that has been in place for some while to encourage investment in smaller growing businesses has been removed.
"This is further evidence that rather than supporting smaller growing companies, the government are hemming them in," he added.
There will be some gainers. Individuals who trade shares and pay capital gains tax will pay the new lower rate.There will be some gainers. Individuals who trade shares and pay capital gains tax will pay the new lower rate.
However, the Treasury predicts a windfall of £350m in extra tax revenues in the next financial year as a result of the change.However, the Treasury predicts a windfall of £350m in extra tax revenues in the next financial year as a result of the change.