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Last Updated: Tuesday, 9 October 2007, 17:51 GMT 18:51 UK
Capital gains tax relief scrapped
Boots sign
Alliance Boots was one of private equity's biggest UK buyouts
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%.

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.

"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," said John Pierce, chief executive of The Quoted Companies Alliance.

"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.

Critics, including unions, have argued that this taper relief gave private equity an unfair tax break.


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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.

Executives pay full income tax on basic pay and bonuses
Most of their profit will come from the 20% slice of profit they typically make from selling a business
This 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.

"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.


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.

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