Capital gains tax break for VC disappearing in UK

UK Chancellor Alistair Darling unveiled substantial increases to the tax bills of private equity bosses. The Treasury has carried out a six-month review of the tax treatment of private equity groups in response to growing criticism, particularly from trade unions, that rich owners of such companies pay virtually no tax in Britain. Nicholas Ferguson of SVG Capital admitted this year that many are paying “less than our cleaners”.  Their most controversial activity arises when they buy and sell companies and directors’ income is treated as a capital gain, taxed at only 10% if another company has been held for as little as two years.   This tax break will be axed, to be replaced with a standard rate 18% flat rate capital gains tax.  The change will raise £900m for the Treasury by 2010.  (The Guardian report and NYT Deal Book report.)

The BVCA was not happy. Simon Walker, Chief Executive Designate of the British Venture Capital Association  said

The BVCA notes that the Chancellor has placed emphasis on innovation, enterprise and the need to maintain the UK’s competitive position.   However, we are concerned that the elimination of taper relief means all capital gains, including carried interest, will now be taxed at a single rate no matter how long they have been held. This move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies. A rate of 18% means capital gains tax is higher in Britain than France (16%), Italy (12.5%) or the US (15%) – let alone countries like Switzerland which have no CGT.

The British private equity industry – which accounts for 60% of the European market – is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay, but hope the industry will now be recognized for the contribution it makes to pension funds and the wider economy.  Above all private equity and venture capital need certainty and stability.”

A similar discussion is occurring in the US and financial investors are under pressure to demonstrate their integrity and value deserves special tax treatment.

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