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Last Updated: Wednesday, 10 October 2007, 11:31 GMT 12:31 UK
The impact of capital gains tax changes
Money
There may be a rush of investors selling up before April
A key announcement in Alistair Darling's pre-Budget report was the news that the rules on capital gains tax (CGT) will change from April next year.

In place of the current system of taper relief, which allows investors to pay as little as 10% CGT on profits from the sale of assets in any unlisted company, or publicly listed firm they work for - as long as they have held them for two years - Mr Darling announced a new flat 18% rate.

This new 18% flat rate will also apply to capital gains that are not eligible for taper relief - such as the profit made by someone buying and then selling shares in a quoted company they do not work for.

At present these profits attract tax at three rates - 10%, 20% and 40% - depending on whether the person in question pays income tax at the starting rate, basic rate or higher rate.

The personal annual exemption - currently 9,200 - will remain.

The end of taper relief has generally been seen as the government responding to criticism that the private equity sector has been paying too little tax on excessive profits.

However, business leaders have been quick to attack the change in CGT, saying it will stifle entrepreneurship, and also hit small firms and employees who own shares in their companies.

Here we take a closer look at the likely impacts of the change.

PRIVATE EQUITY INDUSTRY

Private equity firms will pay more CGT on their investments from April 2008.

The core issue here is something called "carry", the 20% slice of profits that private equity groups can pocket from the companies they have bought once they have paid back their investors.

Presently they pay just 10% CGT on this carry, as long as they hold onto their investments for two years or more.

From April they will have to pay 18% CGT on this profit, regardless of how long they wait before cashing in.

"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," says Simon Walker, chief executive-designate of the British Private Equity and Venture Capital Association (BVCA).

COMPANIES IN GENERAL

The Institute of Directors has called the announcement of the end of taper relief "yet another unwelcome hit on business".

Instead of just targeting the private equity sector, business argues that it will hit all investors in UK companies of all sizes.

A small businessman who is thinking of selling up his long-established firm will from April have to pay 18% CGT instead of 10%.

As a result, Allan Holmes, a director at commercial law firm Dickinson Dees, said he expects to see a rush of small firms being put up for sale before April as people try to beat the deadline.

John Cridland, deputy director-general of the CBI, added: "Raising the minimum Capital Gains Tax rate to 18% will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK's vital private equity industry."

"This is disappointing and may lead to a reduction in investment in start-up and growing businesses"

EMPLOYEES WITH COMPANY SHARE PLANS

Staff who have been given shares in their publicly listed company as part of their wider remuneration will also be hit by the end of taper relief.

At present the same taper relief rules and 10% tax applies if they hold onto these shares for at least two years.

But now they will have to pay 18% tax, regardless of how long they have held them.

Sarah Pickering, partner at Ernst & Young, said the change would inevitable cause a rush of people disposing of shares before April.

"While the simplification in capital gains tax is welcome, the change seems inconsistent with the aims of wider share ownership and long term wealth creation," says Ms Pickering.

However, it is important to stress that the 9,200 annual exemption rate for capital gains tax appears to be continuing.

So if you sell some of your company shares, or any other investment, you won't have to pay capital gains on the first 9,200 of profit realised in each financial year.

You can also continue to transfer a further 9,200 tax-free each year to your spouse or civil partner, and any profit made from the sale of your main home is also exempt from CGT.

However, Ms Pickering cautions that the devil may still be in the detail.

"We do think the annual exemption will remain in place, but in all honestly, we will all have to wait and see the exact details in the Treasury documents."

The full details of the new single rate 18% CGT will not be released until the publication of the 2008 Finance Bill early next year.

UK COMPETITIVENESS

Despite the new 18% flat rate in CGT, Mr Darling said in his speech that the UK would continue to have "one of the most competitive single rates of any major economy".

However, the BVCA says the new CGT rate will be higher than the US (15%), France (16%) and Italy (12.5%).



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