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back to article Honest startups versus City bastards - the CGT conundrum

Why the Chancellor of the Exchequer, Alistair Darling, had to propose altering capital gains tax (CGT) back in the autumn is pretty simple to explain. There was a certain amount of vociferous shouting (led by the Guardianistas, of course) that the sight of private equity barons paying less tax than their cleaners was a moral …

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The problem will come in 10 years time

The problem will come in 10 years time when a million quid buys you a round of latte's in a London coffee shop and no-one at the Treasury has updated the limit.

A budding entrepreneur hoping to make some capital gains one day - Paul

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So, in summary:

Progressive tax bad. Regressive tax good.

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5% owners only

It seems like you need to own 5% of the business to benefit from the new 10% rate, though. Most entrepreneurs will have their holdings diluted below this level by funding rounds, and I can't imagine many have 5% left when they sell up. This might apply to small businesses in general but not to high tech startups.

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Unhappy

Probably won't help me

I've been working for a while as a contractor for a very small company (but only making about the same as an employee) and I've been pouring my blood, sweat and tears into it but I can't afford to be gifted any equity by them because as soon as they do, I have to pay 40% CGT on the value! But I'm just a pleb with almost no cash in the bank so how am I supposed to do that?

At least it looks like that comes down to 18% but I bet it's not going to be the 10% figure for me even though we're only talking about an investment of a few grand that I'm planning on keeping long term.

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Black Helicopters

Wastes of Space

They're politicians, Tim, and they have never solved anything in their lives. I have concluded that things work a lot better if you just ignore them as they rarely have any idea about what is going on around them as they are far too busy covering up their mistakes and looking for the next scam.

But please, if any of them wish to prove me wrong, then I will be delighted for to be so proved not right.

£50 billion, or whatever figure is flavour of the moment ,"invented" and lodged for drawing from Northern Rock, [the Olympic fund is maybe not attracting enough interest for white elephant investment?] is the old Wild West fiat currency trick which allied to sub-prime toxic waste sales of bad debt parcelled to look like future good credit and sold on to valued customers [now there's a kick in the teeth for potential friends] and now a credit crunch with punters realising that they're paying through the teeth for things which are long gone and that was always the masterplan/card intention, and taxes and prices increasing right, left and centre and and and ..... who needs them. The Civil Service could run the Country better without any of them milking the Treasury of Funds and feathering their nests with perks and allowances and drivers and cars and round the clock protection [like some paranoid, delusional self-important hood/jumped up little pip squeak of a dictator] .... Ooops I appear to have gone off on a rant .

Who would want to privatise them as a valuable going concern? Methinks that would bomb out in the markets.

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Linux

ISA's???

It seems to me that part of the CGT problem for small share/stakeholders is met by cash or share ISA's .... What should be done now is to get this allowable amount of 7k/year increased, probably above inflation (like Council tax...allegedly), to cover the cost of CGT on, say , a partly-let family home (partly subject to cgt at 40% or so currently on sale, and allow cgt carry-over on reinvestment) , or someones sharesave scheme at work. CGT can be a nightmare if you're not properly prepared.

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Happy

Re: Probably won't help me

I'm not an accountant, but this is my understanding of the current taper relief system. If you have been holding the buisness asset for 2years you will get taper relief at 75%.

So if you had an asset worth 100quid the CGT'able amount would be 25quid

As a high rate tax payer you would be liable for 40% of this amount or 10quid. (or 10%)

So you can see how taper relief is 10% rather than increasing to the flat rate 18%. Don't forget your free yearly CGT allowance.

Also check out ESC C16

Steve

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Paris Hilton

Ghaa!

Bloody guardianistas!

Why is it that people still think of these things as zero-sum games (If I take out 4 slices of pizza that means someone else only gets two) rather than what they truly are which are non-zero sum games (If I borrow 12 slices of pizza then I can manufacture 7 more, keep 4 for myself and pay someone two to work for me and return 13 to the guy I borrowed from). Instead we get the sudent politics version of economics; "if you get more then that must mean that I will get less"

Private equity has been a positive force on business (and therefore the UK econmomy and therefore the people who live here). There are swathes of independent studies to back that assertation up, trawl through The Economist archives if you want to read them, particularly the "Buttonwood" and "Economics Focus" sections.

We should all also remember that private equity companies are, by defenition, already in things for the long run. The whole point of PE is taking a company off the public markets, kicking the existing management team out on their arses for running it badly and implementing the often painful changes needed to make that company profitable (and therefore able to continue to employ most of the workers) before selling it back to the markets for (hopefully) a fat profit.

Perhaps being good at your job, and having the brains to study and locate the jobs that pay the most for your time is now a bad thing and we should punish these smart kids as a warning to anyone else who has similar thoughts.

PH - I'd expect the same level of thought from her.

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Not just 10% -> 18%

Another reason for the outcry is that AD is also scrapping indexation which means that assets held before 1997 (ie. pre-GB's first CGT "simplification") will no longer be inflation-indexed, thus capital gains purely due to inflation will also be taxed when these new changes kick in.

Hence for some the increase in tax paid could be (say) 1000% - not good.

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IT Angle

Accountants

If you earn enough, you pay an accontant part time to save you more money on tax than the accountant costs. Your tax burden is lower. Poor people can't afford to avoid tax.

If you're rich you can remove yourself to the Cayman Islands/Jersey/Bognor (or wherever you can) and avoid ALL taxes.

See Sean Connery for an example. How much tax is he paying in Scotland? Loves it there, though.

MS paid 0% corporation tax. They funnell patent profits through Ireland (where there is no tax on such income) and move the liabilities around to offset the taxes they do have to pay.

This is only available if you have enough money.

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Thumb Up

Future article requests:

i) The impact of rare metals in near-term technologies

ii) The impact of fuel cell cars on the wider economy due to their use of rare metals

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Anonymous Coward

A few thoughts....

This whole CGT reform exercise has been extraordinary, coming as it does from the government that introduced taper relief in the first place.

As you rightly point out, Gordon Brown deserves his due for introducing taper relief, as an excellent incentive for investment in businesses.

Hundreds of thousands of people invested in business assets assuming that taper relief would be applied to any capital gain that they made. I believe that they have a legitimate expectation that the government that introduced the incentive would allow them to benefit.

What caused the Treasury to move the goalposts after almost ten years? As well as the concern over the “private equity fat cats” it has been reported that “the cost of taper relief had risen 10-fold in four years to more than £6 bn, far more than the Treasury had anticipated”. It seems likely that the Treasury was becoming worried about this perceived loss of revenue.

If you consider this further, a “loss” of £6 bn (I believe this was calculated on the basis of the tax that would have been raised at a 40% rate of CGT) means that the government was actually making some £2 bn a year from CGT paid on gains on assets eligible for taper relief. The Treasury evidently views the world from the “glass half empty” rather than “glass half full” perspective. It would be interesting to know what percentage of the £6bn “cost” arose from private equity deals. CGT receipts in 06-07 were £3.8 bn, so it seems that about half of the receipts come from assets eligible for taper relief.

According to the 2006 and 2007 Budget Reports rising CGT receipts were at least partly due to the “maturing” of business asset taper relief.

It seems to me that the 10% rate of CGT on assets eligible for taper relief was actually leading to an increase in tax revenues, but the Treasury did not have the nerveor the common sense to follow through on this. I believe that in other countries, reducing tax rates on e.g. corporation tax has led to an increase in tax receipts. Removing taper relief may well result in a fall in CGT revenues, the opposite of what Alistair Darling is seeking.

How to separate the “Honest start-ups” from the “City bastards”? One possible approach would be to offer taper relief to those investors who invest in a company BEFORE it gets to the kind of size that will interest those in the city. This could be done using the investment limits currently being applied to Venture Capital Trust (VCT) or Enterprise Investment Scheme (EIS) investments; for investment of funds raised from 6 April 2006, the value of the company’s gross assets must not exceed

• £7 million immediately before the investment, and

• £8 million immediately afterwards.

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