As Alastair Darling faced the wrath of business groups this week campaigning against his decision to scrap the 10% rate of CGT next April the question has to be:
Why was such a furore created by Darling’s proposal to simplify capital gains? I doubt a significant cull of red tape and a 55% cut in the headline tax rate has ever provoked such fury from business organisations.
The ire of the CBI and others has been directed at the abolition of taper relief. This means that the tax on capital gains from the sale of shares held for more than two years in unlisted trading businesses, including AIM companies, will rise by 80% from next April.
However, this response misses the bigger point. CGT will still only be levied at a flat rate of 18%, and on all deals including those where the levy used to be 40%.
Yes. That’s less than the basic rate of income tax. So, private equity executives will still be paying tax at a lower rate on their bonuses than their cleaners do on their pay. No wonder their beleaguered lobby group, the
M&A bankers should also be pleased. In the short term, it should prompt entrepreneurs seeking an exit to push ahead with their plans before the end of the tax year. That should boost bonuses.
Those pay outs will still be taxed at a significantly higher rate than private equity “carry”. But all City toilers should benefit indirectly. Much of their surplus cash has gone into second homes, holiday cottages and other property. The lower tax rate on sales should boost the effective value of that real estate noticeably.
The proposals look more likely to hit tax accountants rather than destroy enterprise. Volumes of business sales look unlikely to be affected. As one M&A adviser told me: “It is still more tax efficient to sell a business than take income out of it by dividends.”
• In what is good news for European private equity the European high-yield market, which had seen no new issues since July 23, is finally showing signs of life with a number of deals courting public attention. These include the Barclays-led five-year PIK loan for
“It shows the market that even something as difficult as a PIK loan can still be done,” said a source close to the deal.
The bond-like transaction was launched in July and signed on October 12 after protracted negotiations with the primarily European investor group.