Private equity cannot be solved by tinkering with CGT

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Accountancy Age has covered a story first reported by the FT and says:

The private equity industry is facing a tough shake-up in the way it is taxed, with chancellor Alistair Darling proposing stiffer capital gains tax (CGT) rates and lengthening the taper relief period.

According to the FT, Darling is considering an increase in CGT from 10% to 20% for businesses classed as business assets as well as an increase in the taper relief period from two years to five years.

I’m all in favour of the 20% rate. There never was a reason for the 10% rate, which was far too low.

I’m also quite happy that:

Also under consideration is the idea of drawing a tax distinction between mega-fund buyouts and small venture capital deals.

I’ve made clear, I agree with this. These are two quite separate activities which have fundamentally different risk profiles and roles to play in the economy.

But you can bet your bottom dollar that this is right:

The reforms were reportedly discussed in meetings last week between Treasury officials and private equity representatives. Buy-out bosses are said to be relieved by the proposals, as they feared much harsher measures.

They must be laughing themselves silly. The simple fact is that only private equity employees pay capital gains tax on their earnings from employment. Everyone else pays income tax. And all Alastair Darling is proposing to do is double their capital gains tax rate to a level which will still be half of that which is due under income tax rules.

This is madness. Not least because as the Observer has (I think reliably) pointed out, at least 80% of those involved are non-domiciled and as such can record their capital gains outside the UK, and so tax free.

For heaven’s sake, it’s time for the government to smell the mood of the nation and stop tax abuse of this sort. Let’s have a level playing field, now.