News & Views

The reasoning has been that an increase is likely. The Lib Dems had it as an election pledge, and was one of the ideas that was co-opted into the coalition agreement. So what’s the reaction been to George Osborne’s first Budget and the effect of a higher rate of CGT? And what’s the realistic expectation of a business owner in the North West of England looking to realise some value by selling a business?

Phil Orford, the chief executive of the Forum of Private Business, had it right when he said the 28 per cent rate is a “gentler increase” than he expected, but was more exalted by the rise in the entrepreneurs’ relief threshold to £5m, which he says is “more than we could have hoped for and it should ensure that most small business owners aren’t penalised too heavily when they come to sell their companies”.

But Catherine Robins, tax partner at Pinsent Masons, has noted that Osborne hasn’t relaxed the strict qualifying criteria for entrepreneur’s relief, despite lobbying from the private equity sector. “Shares will still only qualify if they are held in a ‘trading company’, and the shareholder is an employee with a holding of at least 5 per cent. This will be disappointing news for many management shareholders, and also ‘carried interest’ holders, who frequently do not meet the 5 per cent qualifying condition, as there had been hopes of a more thorough overhaul of the regime.”

But will it make a difference? That’s the key question. Tax changes have to be subtle, or they risk reducing tax take.

And how much does a tax regime encourage investment and risk taking in business? For many business owners it’s also about providing a scheme that their key managers can take part in that doesn’t tax them too much if there’s a nice upside down the line. The best news in that regard was that the tax free amount will remain at £10,100 – it was feared that this could fall to as little as £2,000 – and the standard rate remains at 18 per cent for basic rate taxpayers. Which has to be good news for those on the shop floor with shares in their employer.

Mike Walker, private client partner at KPMG in the North West, says these changes are likely to provide only limited revenue for the government: “People don’t have to sell and history shows that when rates rise, they don’t. Indeed, the domino effect of CGT rises can be massive – this rise could reduce investment and employment and in turn lower receipts from income and stamp taxes.”

But Simon Walker, chief executive of the British Private Equity and Venture Capital Association, has been quick to point out that CGT is high compared to countries like the Netherlands (0 per cent) Italy (12.5 per cent), the USA (15 per cent) and Switzerland (zero).

“The sharp rise in CGT will discourage investment in this country and leave the UK in an uncompetitive international position. This has to be the cause of deep concern. Entrepreneurs’ relief, as currently constituted, does not cover those involved in the investment chain that brings a new idea to the market and its scope should be reviewed by ministers. It would be of real value if the Chancellor made it clear that no further increases in this tax regime will be introduced in this Parliament. Certainty is the essential foundation for innovation. Without this, venture capital will be severely constrained by the creation of the new 28 per cent rate.”

I find myself asking this question: will the venture capital and private equity investors stop looking for ways of making money by investing? No. Will it make the job of raising a fund so hard as to prevent them doing so? Probably not. And will those who do so find fewer opportunities as a result of these changes? No, again. Do I expect the private equity industry to like it? Doesn’t matter.