In the new UK coalition government’s emergency budget, Chancellor George Osborne announced that capital gains tax (CGT) – which is applied to the carried interest schemes of alternative investment funds – would be increased from 18 percent to 28 percent as from midnight tonight.
There had been much media speculation that capital gains would be treated as ordinary income for higher rate taxpayers, resulting in a top rate of 50 percent. However, Osborne expressed the view in his budget speech in the House of Commons that this would be counter-productive as revenues would be lower. Studies have shown that when CGT reaches punitive levels, asset sales that trigger CGT tend to be put on hold and there is more of a focus on tax avoidance schemes.
Reactions to the news from those representing the alternative investment fund industry were mixed. From the British Private Equity and Venture Capital Association came a hostile response. Chief executive Simon Walker said in a statement the “sharp rise” would “discourage investment in this country and leave the UK in an uncompetitive international position”. He added “this has to be a cause of deep concern”.
The BVCA’s statement included a table of the CGT levied by 16 selected countries around the world, which showed the UK now has the second-highest CGT rate of the 16. Only in France is the rate higher, at 30 percent, with 14 lower rates ranging from zero percent to 26.4 percent.
Meanwhile, the response of Liz Peace, chief executive of the British Property Federation, was more nuanced. In a statement, she said: “Simplifying the CGT rise to 28 percent by not tinkering with taper or indexation relief shows a welcome desire to keep things simple. Thankfully, the rate of CGT has not been brought into line with higher rate tax levels but this is something that many will not be happy about.”
She added that “buy-to-let investors who have propped up the housing market over the last 20 years will suffer and this could hit the future supply of rented housing. However, on the whole there are positive signs here about the new government’s tax philosophy.”