Chancellor is no Darling for firms over capital gains tax

Oct 17 2007 by Tony McDonough, Liverpool Daily Post

BUSINESS advisers and accountants in Merseyside yesterday reported a surge in clients looking to sell their businesses before the new 18% capital gains tax rate kicks in next April.

One accountancy firm told the Daily Post that up to 15 clients had called to discuss the possibility of selling up in the next few months.

Last week, Chancellor Alistair Darling sent shockwaves through UK businesses when he announced the scrapping of the 10% taper relief.

Up until April next year people who have owned businesses, or shares in companies, for more than two years will pay just 10% capital gains tax if they sell their holdings, but after that it increases to 18%.

The move, which followed widespread outcry over the minimal tax being paid by private equity practitioners, has angered business groups across the country who argue it is smaller firms, seen by many as the lifeblood of the economy, who will be hardest hit.

On Monday the UK’s four main business groups united to write an open letter to the Chancellor, urging him to suspend the proposal.

The heads of the British Chambers of Commerce, CBI, Federation of Small Businesses and Institute of Directors say the policy reversal came “as a bolt out of the blue” and they have written collectively to Alistair Darling because “the reaction of their combined memberships has been so universally strong”.

The letter says that the impact of the decision will be felt throughout the economy by discouraging longer-term investment and risk-taking.

They claim it threatens to hit the investments of those who have built up a small business, increase the tax bills of the 1.7m employees in share ownership schemes, and “discourage business angels and venture capital funds from investing for the long game”.

Accountants and advisers in Liverpool and across the North West have told the Daily Post that many of their clients have contacted them in the wake of the announcement. A number are keen to sell their assets before the April deadline. The pension plans of some company directors depend heavily on paying the lower rate.

A spokeswoman for Ernst & Young in the North West said: “It’s fair to say that our tax partners in the North West have had more than 15 discussions to date, with individual entrepreneurs and members of the private equity community who are deeply concerned about the changes to taper relief and the impact it will have.”

Jane Jackson, a tax partner at the Liverpool office of PKF, said they had quickly identified the winner and losers among their clients.

She added: “We’ve had floods of enquiries from clients who are in the process of selling or grooming their business for sale and are anxious to do the deal before April 5 to avoid a hefty tax bill.

“I had a call from a Liverpool business worth £5m anxious to know how to avoid an additional tax bill of £400,000 should they delay the sale after April next year.

“We are also discussing the implications with clients who have recently sold their business in exchange for loan notes or deferred consideration to see how they can protect their position.”

However, Ms Jackson also pointed out that property investors could benefit as after April most will now longer have to pay the current 40% rate.

She said: “Feedback from property clients has been very positive because from April they can move their stock for an 18% charge rather than a 40% hit especially buy-to-let investors who have made their gains over the last couple of years.

“However, they are also aware that there will be sharper scrutiny from the taxman over whether as individuals they are trading in property or investing in property.”

Brian Clark, a senior partner at PricewaterhouseCoopers in Liverpool said Mr Darling’s announcement had caused considerable upset.

“For the last week we have been getting phone calls from clients unhappy about the change,” he said. “A lot of them are upset and it is not just business owners who are looking to sell but also people who own shares on the Alternative Investment Market.

“You may say well why don’t they just sell their shares, but the fact is some of them are sitting on a loss at the moment and selling isn’t a desirable option.”

Mr Clark did add that one positive thing to come out of the change was that it meant the tax regime was now much simpler.

tonymcdonough@dailypost.co.uk