Government retains 18% CGT above £1m

SME entrepreneurs have benefitted from the retention of taper relief on capital gains of up to £1 million. But industry body the BVCA argues the 18 percent flat rate will make the UK less competitive.

The UK government has softened its capital gains tax reforms by retaining a 10 percent rate of “taper relief” for capital gains by small scale entrepreneurs, according to a statement.

Alistair Darling:
on CGT

The statement said cumulative gains of more than £1 million ($1.96 million; €1.34 million) during an individual’s lifetime will attract the standard 18 percent rate, which had initially been introduced as a flat rate change.

The change to the tax regime will be activated on 6 April 2008.

The original change to a flat tax targeted the 10 percent “taper relief” private equity executives received on capital gains.

Simon Walker, chief executive of the British Private Equity & Venture Capital Association, said in a statement: “The announcement by the Chancellor today changes very little for our industry. Whilst it provides an important relief for small businesses, it does not address the question of how to encourage serial entrepreneurship, which is at the heart of business growth and development.” He said the 18 percent change made the UK less competitive than before.

Peter Harrup, tax partner at accountant PKF, said the move would satisfy some SME owners who have felt under pressure to sell up before April to avoid losing taper relief.

“But rather than simplify the system, the Chancellor is introducing new layers of complexity… In future years, we can look forward to an endless array of new rules to try to shut off all the loopholes that they haven't even begun to think of yet,” he said.

The original move also attracted widespread criticism from trade body Confederation of British Industry and business luminaries such as Apax Partners co-founder Sir Ronald Cohen and Virgin Group owner Sir Richard Branson.

The latest move is likely to partially mollify these critics, who have rallied to the defence of entrepreneurs. But those who have argued the changes will damage London’s position as a private equity hub, such as the BVCA and the Pension Corporation’s Edmund Truell, are unlikely to be satisfied with the reforms.