Carried away with it

The UK Chancellor has increased the tax burden on the country's beleaguered buyout executives. But his move is carefully calculated to keep the industry in London, writes Nicholas Lockley.

The truth is most buyout executives knew the writing was on the wall months ago and had resigned themselves to an end to the generous taper relief on capital gains.

As expected Alistair Darling scrapped the taper which could go as low as 10 percent and delivered in his pre-budget report a flat rate of 18 percent to ensure the industry comes closer to matching its cleaners’ income tax payments.

Introduced by the Chancellor’s predecessor the taper relief had meant to encourage entrepreneurs, which it did as well as helping make the UK one of the economies most conducive to private equity.

Privately many executives would admit the taper had provided a generous boost and they could barely believe their luck it had held so long.

Now the game is up and the industry’s advisers are crying foul. One said the abolition was “set to put massive pressure on the private equity industry, which is already feeling the sharp end of the credit crunch”.

Simon Walker, chief executive designate of the BVCA said the move will hit not just private equity but thousands of venture capitalists, family businesses and small and medium-sized companies.

This is of course very high-minded of the BVCA, but a fair comment given its membership’s predominantly mid-market flavour.

A rate of 18 percent means capital gains tax is higher in the UK than Italy with 12.5 percent or the US on 15 percent – let alone countries like Switzerland which have no CGT.

But crucially the rate is lower than France or Germany, the UK’s closest rivals in financial services, according to a tax specialist at law firm SJ Berwin. Thus the move is unlikely to cause an exodus of managers from the UK and at least it provides stability and certainty.

And it will probably give the market a kick-start as managers bring forward sales before the tax hits in 2008.

Anyone suggesting otherwise is probably getting carried away, unless they are mulling a move to Spain: same CGT, better weather as one lawyer quipped.