Private equity did not escape unscathed. The announced abolition of taper relief and the creation of one flat capital gains rate is a response to the low tax rates paid by wealthy private equity executives and will see smaller businesses’ rates hiked from 10% to 18%.
But many had expected Chancellor Alistair Darling to come down harder on high-earning private equity vehicles. In fact, some tax partners report that the creation of a flat 18% capital gains tax (CGT) for all investors means their big clients feel they have got away quite lightly — having faced the prospect of their profits being treated as income and taxed at 40%.
The effect on smaller businesses — and entrepreneurs — will have the greatest impact on clients of lower mid-market law firms. This effectively fires a warning shot to nationals, which have long enjoyed a steady stream of business from growing out-of-town industrialists. The move has prompted the Confederation of British Industry to write to the Chancellor warning of the potential damage to business-building while the British Venture Capital Association complained the change will mean UK CGT is higher than in
The mood is understandably more upbeat at larger law firms, where client bases are increasingly focused on the buy-outs of mature businesses. Private equity partners at magic circle firms believe the major houses have got off lightly.
A further relief is that the tax on shareholder debt has not been raised, as was feared after the subject was addressed at a Treasury select committee meeting earlier this year. While the credit squeeze has halted large leverage-backed private equity acquisitions for the time being, an increase in tax on debt was one measure that some said would push business to foreign shores when they return.
A related measure to have gained the thumbs-up from lawyers is the Government’s proposals to tax non-domiciled individuals a flat rate of £30,000 per year, but only after they have been in the country for seven years.
Clifford Chance tax partner Douglas French comments: “The fact that the proposals for non-domiciled individuals only apply to individuals who have been resident in the UK for seven years is clearly designed to ensure that they will not apply to foreign nationals working in the City for a few years only — and in that sense they seem to be more ‘City friendly’ than the equivalent Tory proposals.”
That this sort of reaction is typical of City lawyers is evidence of the balance that the Government seems to have struck between securing more tax while not quite deterring foreigners from the City.
Ultimately, if the credit crunch does not cause a long-term jam in transactional work, top