Private equity loophole closed
Stealth tax introduced on small businesses

The Government has been accused of introducing a stealth tax on small businesses by closing a concession aimed at entrepreneurs that was exploited by a small group of billionaire private equity bosses.

The Chancellor said that he would abolish so-called taper relief on capital gains tax - which allowed private equity firms to pay as little as 10 per cent tax on the bulk of their profits. But rather than make the rule specific to private equity, as many had been expecting, the Chancellor’s new 18 per cent tax rate will be applicable across the board.

The move will benefit landlords, second home owners and private investors who could pay substantially less tax on their capital gains.

Currently, higher rate taxpayers who sell a property that is not their main residence, or shares in companies listed on the main stock market and make a profit of more than £9,200 could pay as much as 40 per cent tax on their profits if they sell within three years. After ten years, the effective rate of tax falls to 24 per cent. They will now pay the new 18 per cent capital gains tax (CGT) flat rate.

This is the largest change to capital gains tax since Gordon Brown instituted taper relief a decade ago and fundamentally returns the tax system to where it started.

Small businesses will be the losers under the new regime. Taper relief was introduced by Mr Brown in one of his first acts as Chancellor as a way of encouraging enterprise. It emerged earlier this year that private equity firms which buy companies using huge amounts of debt were exploiting those rules to pay minuscule tax on the “carried interest”, or profits, that they made on their investments.

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