LONDON (Thomson Financial) – UK Chancellor Alistair Darling's proposed changes to the capital gains tax system could damage the UK's burgeoning entrepreneurial culture, tax experts said today.
Darling announced in his Pre-Budget Report that the government will scrap taper relief on capital gains tax — a mechanism used by private equity investors whereby they pay only 10 pct on the sale of stakes they hold in companies provided they've held them for at least two year. Instead, Darling said he is proposing one single rate of capital gains tax to be levied at a rate of 18 pct.
However, his proposals came in for criticism from tax experts who said that, in trying to address criticism of the tax regime enjoyed by private equity investors, he could damage the wider economy.
'We are extremely disappointed with these proposals as they threaten to undermine the entrepreneur culture that has blossomed over the last decade,' said Paul Davies, UK head of tax at Ernst & Young.
'Complete abolition of the taper removes a large incentive for entrepreneurs and challenges the 'Dragon's Den' success of the UK,' he added.
Meanwhile Bernard Sweet, director of corporate tax at tax advisers Chiltern, said the effect of the reform would spread much wider than just the private equity industry.
'Many smaller companies, their staff and investors will suffer as this relief is withdrawn,' he said.
'This could backfire on the Government — it is a blow to hard-working entrepreneurs,' he added.