Darling backs down on CGT (sort of)

Finally, some good news on capital gains tax – unless you're a serial entrepreneur, that is.

Last Updated: 31 Aug 2010

After months of lobbying from business groups, Alistair Darling has agreed to introduce an ‘entrepreneurs’ relief’, which will mean that investors and business owners pay 10% tax on their first £1m of capital gains. After that, they’ll be liable to pay the new flat rate of 18% that Darling introduced last autumn.

In some ways this is good news – it means, for example, that many small business owners will probably pay the same low rate as tax as they would be entitled to now when they come to sell up. Darling reckons that 80,000 people in the UK will benefit.

But although it’s a climb-down, it’s only a partial one. The main objection to Darling’s original plans was that there was no need to change the rules in the first place – hiking capital gains tax by 80% sent out exactly the wrong message to the business community at exactly the wrong time.

Even with the revisions, it still amounts to a £700m tax hike for UK plc. Businesses will be worse off across the board – as the CBI’s Richard Lambert said yesterday: ‘The reality is that these revised measures will do nothing to help the real business powerhouses of this country.’

What’s more, it seems slightly strange that this ‘entrepreneur’s relief’ actually gives very little relief to the very best and most successful entrepreneurs. A serial entrepreneur who builds a series of successful businesses (creating jobs and wealth for the economy) will now be punished in the same way as these invidious financiers who apparently pay less tax than their cleaners. Perhaps it would have been difficult to legislate for the two groups separately, but this still doesn’t feel right.

As for the Chancellor, this latest episode won’t exactly do wonders for his credibility. Bringing in a big tax hike for entrepreneurs at the start of your tenure was a pretty rotten way to endear himself to the business community. It also left him facing the impossible choice of sticking to the plan and appearing inflexible, or changing his mind and appearing weak. Not surprisingly, the Tories were scathing yesterday – Shadow Chancellor (and soon-to-be MT cover star) George Osborne called it a ‘humiliation’ for Darling, and a ‘text-book example’ of how not to introduce tax changes.

Then again, after his illustrious predecessor spent a decade raiding the piggy bank, the beleaguered Chancellor would probably admit privately that he had to scrape together a few pennies from somewhere...

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