UK – Pre-Budget Report: Darling’s folly

The 80% increase in the capital gains rate and the abolition of taper relief announced yesterday by Chancellor Alistair Darling was a decidedly unimaginative and populist measure. Surprisingly, it also happened to be a net tax raiser. The establishment of a flat capital gains rate will disproportionately harm the lower end of the market, especially the venture space. The justification for a flat rate was ‘simplicity’ but this begs the question: simplicity for whom? A venture capital fund manager or a start-up manager would surely have preferred a more ‘complex’ system as a trade-off for a more competitive rate of tax. Having coped with taper relief and the complexities this introduced, it is doubtful that the army of tax lawyers in the City woke up yesterday praying that the Chancellor would make their jobs easier. Conversely, what Darling’s measure does is make redundant a body of knowledge on taper relief and capital gains issues accrued over many years. For the large buyout space, it will be business as usual. An 18% capital gains rate is easily absorbed and may even be good for business if private equity houses look to sell before the tax changes become effective in April 2008.