Thursday, October 11, 2007

Private Equity CGT Doubles Under the UK Tax Reich

Private equity and advisory firms have expressed their 'disappointment' at the latest tax bonanza announced by the new Chancellor of the Tax Reich, Herr Darling, after he announced that business taper relief on capital gains will be abolished and replaced with a flat capital gains tax rate of 18 per cent from April 2008.

It is a reduction from the previous top rate of 25 per cent but the move abolished the previous 10 per cent reduced rate for investments held more than two years.

The Chancellor's 'initiative' was prompted by a surge of political testosterone on both sides of the Atlantic over the ability of private equity firm partners to have carried interest profits from their funds taxed at favourable rates of capital gains tax rather than as income, at a rate of up to 40 per cent.

Herr Darling announced to Parliament in his Pre-Budget Report: 'I can tell ze house ze changes I propose to capital gains tax, taken togezer with ze tax loopholes zat I am closing, will ensure zat zose working in private equity pay a fairer share.' Clicking his heels he then went on to start on non-domicile taxation, but that I shall save for another day.

Simon Walker, chief executive designate of the the British Private Equity & Venture Capital Association (the 'British Resistance'), says: '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 per cent means capital gains tax is higher in Britain than France (16 per cent), Italy (12.5 per cent) or the US (15 per cent), let alone countries like Switzerland which have no CGT.

'The British private equity industry - which accounts for 60 per cent 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 recognised for the contribution it makes to pension funds and the wider economy. Above all, private equity and venture capital need certainty and stability.'

Anneli Collins, head of private equity tax for KPMG in the UK, says: 'PE bosses will indeed now pay the same tax rate as their cleaners. But entrepreneurs who have built up businesses over their lifetimes and were perhaps looking forward to selling up to fund retirement will find that unless they can do it before next April, they will pay eight per cent more tax than they were expecting to.

'True, the changes mean a single rate will be in force, but the playing field has not been levelled at all. UK private equity will be taxed at 18 per cent, while non-UK domiciled private equity will be subject to a flat tax of £30,000 per year - and then only after seven years.'

It is obvious that there will now be a stampede of business sales before April 6th next year as business owners seek to avoid the tax, for those suffering the problems of the credit crunch this will just exacerbate the situation.

According to Grant Thornton corporate tax partner Stephen Quest, the increase in capital gains tax represents in effect an 80 per cent rise from what is currently paid. It may act as a major disincentive for private equity executives to take the risks they were currently taking, and is likely to impact negatively the industry's recruitment and retention rates.

In a cock up of Biblical proportions Herr Darling may have given the industry the kick up the backside it needs to leave the UK. The next 12 months are already set to be extremely difficult for buy-out firms, who reported their most negative forward-looking expectations ever in a survey carried out by Grant Thornton Corporate Finance last week, with 63 per cent of private equity executives predicting a downturn in deal values.

Reassessing business models will be the order of the day for private equity firms and it is plain that the competitiveness of the UK will diminish when this comes in. I believe that Herr Chancellor just made a massive error and may go back on this tax hike.

The Chancellor obviously sat down with his, equally as dim, lieutenants and decided that rich private equity Barons were taking the proverbial out of the tax man and so came up with a half baked scheme that now encompasses people who have worked all their lives to create a business and nearly doubled their tax rate.

Gordon Brown has never been one of my favourite politicians as I believe he is a 'Pinko Commy' willing to suck the life out of the UK through stealth taxes. In his time in the cabinet he has made over 85 tax hikes which has equated to £2.3 Billion per week more in tax in the UK than in 1997.

This latest Brown inspired - Darling delivered cock up is by far the most badly timed, ill thought out political vomit to come out of the Tax Reich that I can remember.

Grant Thornton said 'This is the most negative forecast we have ever seen from the private equity sector and a huge drop in confidence from just three months ago. With the capital gains tax increase announced today, it seems the light at the end of the tunnel is an oncoming train.'

In conclusion, there is one thing I would like to highlight from the above post that you really should pay attention to ".....countries like Switzerland which have no CGT."

Will the last person to leave the City turn the lights out please and I will meet you at Geneva airport.

If you would like to get a taste of the community in Switzerland, there are tons of expat site...I like the look of a new one that has started...check it out here.....

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