Tax reforming U-turn
Token £100,000 tax relief aimed at softening the blow!

Tax changes announced during the Pre-Budget Report by the Chancellor aimed at cracking down on high-earning private equity executives that would have also affected thousands of small companies, employees and shareholders are about to see a U-turn.

Mr Darling had originally argued that by introducing a flat 18 per cent rate of capital gains tax (CGT) for all investors, he would “make the system more straightforward and sustainable”. He also added it would ensure “those working in private equity pay a fairer share.”

This tax reforming U-turn would see a single 18 per cent rate of CGT softened by giving £100,000 in tax relief for small businessmen who sell up and retire. The result being that business owners who may have faced a near-doubling in the tax they paid on selling their assets from 10 per cent to 18 per cent, will now pay less.

This retreat by the Government comes after sustained pressure from the CBI, the British Chambers of Commerce, the Federation of Small Businesses and the Institute of Directors, which joined forces against the Government after being flooded with complaints from their members.

The changes could affect other groups apart from private equity. These are likely to include entrepreneurs selling their companies, employee shareholders, investors in AIM-listed companies, start-ups and “angel investors” in unlisted firms.

The winners from these proposed tax reforms are the landlords, second home owners and private investors who could end-up paying 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. Under the Pre-Budget Report proposals they will pay the new 18 per cent CGT flat rate from 6 April 2008.

Mr Darling also announced that he intended to end “taper relief,” the result being that the current CGT rates charged between 40 per cent and 10 per cent would be standardised to a new flat rate of 18 per cent. Business assets held for more than two years are currently taxed at 10 per cent but this will go up to 18 per cent under the proposed Pre-Budget Report announcements. The new rules apply for disposals on or after 6 April next year (2008).

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