The proposed abolition of capital gains tax taper relief will reduce the relative benefits of investing in the kind of emerging businesses that have been the trademark of the successful growing Cambridge economy, says Cathy Taylor, Ernst & Young’s head of tax in Cambridge.
Cambridge Enterprise economy takes a hit from Pre Budget Report
She says: "Chancellor Darling’s predecessor Gordon Brown first introduced taper relief, which in many cases reduced capital gains tax bills on investing in many unlisted companies to just ten per cent if the shares were owned for two years or more.
"This boosted investment in businesses listed on the Alternative Investment Market (AIM) as well as purely privately owned companies.
"Now, the extra incentive to back these companies while they are still in the growth stage, has been reduced.
"The effective capital gains tax on such investments set to almost double in many cases from ten per cent to 18 per cent and what’s more, the same rate will apply to larger investments. In addition indexation, which gives an allowance for inflation, will end.
"This could lead to shareholders wanting to complete the sale of their businesses before April next year, while taper relief is still around, and, of more concern, a significant reduction in finance going into growing business as equity investment.
"Strangely, this government has made a move which effectively favours those with established share portfolios of large listed companies rather than those who are prepared to trade more risk for the higher returns from growing businesses.
"The proposed change seems to be a knee jerk and ill judged reaction to the criticisms of the private equity industry. Unfortunately, the Chancellor’s move has not discriminated and the whole enterprise economy will suffer from higher tax bills.
"Coming soon after recent cut backs in other schemes initially designed to encourage investment, like venture capital trusts, the latest move is a real threat.
"Elsewhere, the Pre Budget Report shows signs of being affected by the dithering over election dates, with moves on inheritance tax (IHT) and airline taxes designed to take the wind out of the Tories’ sails.
"The IHT proposals, making unused exemption transferable between spouses, are unlikely to have much effect, except in capturing headlines designed to suggest a response to the concerns of Middle England.
"The 28 per cent corporation tax rate effective from next April was confirmed, but news doesn’t get better by repeating it. Many countries around the world have much lower rates and we in the UK areas are competing with them.
"The proposals for business tax review for smaller businesses will need to be watched carefully but it seems clear that HM Customs and Revenue are not letting go of their wish to increase the tax bills of small businesses where income is shifted between married couple owner managers to lower tax bills.
"All in all, a Pre Budget Report which reflects the lack of room for manoeuvre as growth prospects are trimmed and public spending continues to rise."
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