Yesterday’s abolition of taper relief on CGT means that the effective tax rate for selling business assets will now go up from 10% to 18%. The move was positioned as an attack on the super-rich – a response to the row over wealthy private equity bosses paying less than their cleaners. After all, who’s going to shed any tears over a tax hike for some of the wealthiest people in the country?
The problem is, this rate increase won’t just apply to private equity – it will also apply to every single person in the UK selling business assets. Private equity bosses may have been the designated bogeymen, but the real losers will be entrepreneurs and small businesspeople – who probably can’t afford an army of accountants to minimise their tax bills.
The new rules mean that entrepreneurs will now have to pay almost twice as much money to the government when they sell up. Is that really the way for a government to promote enterprise?
‘It’s a nasty surprise, a substantial raid on entrepreneurs,’ concedes Stephen Quest, a tax partner at Grant Thornton. By 2010, the government expects to be levying an extra £1bn in CGT. ‘It’s admitting this is a major tax-raising measure.’
Not surprisingly, entrepreneurs are furious. As FreshMinds co-founder Charlie Osmond puts it: ‘It is a great shame that a government which has talked so much about enterprise manages in a single sweep to do so much to damage it. It’s claiming this is a tax on private equity, but the most hit will be managers and employees who take a risk on starting or joining small businesses.’
The move is also short-sighted, he points out. ‘It increases the incentive to start businesses overseas, to offshore jobs and to save money rather than invest it in new companies.’ Commentators have already warned that changing the rules on non-domiciles could lead to a talent drain – could the same be true of entrepreneurs?
And the irony of the whole thing is, it might even do private equity a favour. At a time when deals seem to be drying up, there is now likely to be a flood of assets coming to market before the new rules kick in next April. ‘What we’ll see is a huge amount of activity [before then] as people look to secure the 10% rate,’ says Quest.
A simplification of the tax regime? More like throwing the baby out with the bathwater.