Changes to CGT regime go ahead despite criticism

The Chancellor's target when he announced a shake-up of the capital gains tax (CGT) regime last October was the private-equity industry, where one of its leading figures had famously boasted that executives regularly paid less tax than his cleaner.

Darling confirmed he is abolishing taper relief, which had seen many in the venture capital industry treat most of their profits as capital gains rather than income, and thus ended up paying just 10% tax. That relief will be abolished from next month and replaced by a single rate of CGT at 18%.

Jon Moulton, founder of private-equity firm Alchemy, commented that the Chancellor is raising CGT by too much, and that at the most he should have lifted it to 15%.

But Darling's attempt to eradicate tax avoidance in one specific sector has had a much wider effect than many people expected. This has driven many owners of businesses and individual shareholders in quoted companies to sell up before the end of this tax year.

The Chancellor appeared to acknowledge the criticism by promising "further steps to help small companies simplify" their tax arrangements, affecting 80,000 businesses.

But Geoff Tresman of Punter Southall financial advisers said: "It is difficult to believe the Treasury does not understand the errors made in the Pre-Budget Report, which have adversely affected a number of modest savers and small entrepreneurs, while handing a substantial cut in CGT to people who expected to pay more."

Ken Clarke, the former Tory Chancellor, now deputy chairman of British American Tobacco, sold his entire stake in the business last week. His share sale netted him £88,000 and saved him several thousands of pounds in tax. Similarly Sir John Craven, who chairs LonMin, may have saved up to £173,000 selling shares in the mining giant worth £2.17 million.

There are other winners. Second-home owners, who used to pay between 24% and 40% in CGT, will pay 18%. Inflation-linked indexation, frozen in 1998, is being dropped. The threshhold for people to pay tax on an item bought for £10,000 in, say, 1982 would be around £20,000. Now indexation has been axed, CGT would be liable from £10,000.