Opposition to Chancellor's capital gains tax reforms continues to grow

The howls of outrage came first from the private equity industry, supposedly the chief target of Alistair Darling's pre-Budget reforms of capital gains tax, but they were swiftly repeated by all the leading business groups, enraged at the Chancellor's perceived attack on entrepreneurialism.

Then the trade unions added their opposition and now even BBC show Dragon's Den is joining in. Three of the show's five judges – who each week vet applications from budding tycoons for venture capital funding – yesterday backed the growing campaign against the planned introduction next April of a flat 18 per cent rate of CGT.

What has infuriated Mr Darling's critics is that the reforms appear to favour short-term speculators and second home-owners at the expense of long-term investors and business builders. Under the current rules, CGT is payable at 40 per cent, but taper relief progressively reduces the rate the longer an asset is held. In the case of business assets, the seller pays only 10 per cent CGT on disposals made after two years.

The Chancellor's reforms will also abolish indexation allowance, which enables investors to discount the effect of inflation on the value of their assets. For investments held since 1982, when indexation allowance was introduced, the relief currently enables investors to raise the acquisition cost of their assets by 104 per cent before calculating the taxable gain.

Small business owners are especially aggrieved about facing an 80 per cent tax increase on assets sold after next April, even leaving aside indexation allowance. Going forward, the Federation of Small Business argues that small business owners will not be able to persuade backers such as business angels to invest in future start-ups.

"There is no doubt the number of potential lenders to new businesses will be lower than before," said Simon Briault of the FSB. "This change will shift the risk/reward ratio of this sort of investment sufficiently to deter some investors."

At the centre of the argument over Mr Darling's reforms is the issue of whether the UK will remain competitive with other economies. "A rate of 18 per cent means capital gains tax is higher in Britain than France (16 per cent), Italy (12.5 per cent) or the US (15 per cent)," said Simon Walker, who will shortly take up the chief executive's job at the British Venture Capital Association, the private equity trade body. "Let alone countries such as Switzerland which have no CGT."

The Treasury, however, points out that the CGT rate for individual investors is 26 per cent in France, 20 per cent in Ireland and 27 per cent in Germany. "This measure is internationally competitive," a spokesman said. "People have said they wanted to see a less complicated tax system and this measure fulfils that aim."

In fact, the argument is hard to call. The US CGT rate is due to rise in three years, and homeowners pay tax on profits from the sale of their homes in certain cases. And in many countries capital gains are taxed in line with income.

Chas Roy-Chowdhury, of the Association of Chartered Certified Accountants, said: "There are some favourable international comparisons you can draw, but then again countries such as New Zealand don't have capital gains tax at all and we are clearly a long way from zero."

The Conservatives, who intend to oppose the ref-orms, are due to unveil their own proposals for encouraging entrepreneurs today. Privately, they have sympathy with the idea of simplification, but think that Mr Darling's reforms will weaken British competitiveness.

But even with opposition from the Conservatives and business groups, there is little prospect of a Treasury U-turn, leaving those hit by the proposals with a short window of opportunity.

Richard Brew, the owner of a guest house in Whitby, North Yorks, is one such victim. "We've been in this business for eight years and decided to sell up this year," he said. "Our accountant said we'd face a capital gains tax bill of £20,000, but now she says it will be £60,000 if we can't sell before next April – buyers are bound to use it as a negotiating tool."

CGT around the world

UNITED STATES

Tax on capital gains on assets, including business assets, sold within a year of acquisition is payable at the taxpayer's highest marginal rate of income tax. Assets sold after more than a year attract a flat CGT rate of 15 per cent, though this rises to 20 per cent in 2010. Principal private residences are not exempt, though sellers have a $250,000 tax-free allowance on such gains.

FRANCE

CGT is due on business assets sold after two years or more at a rate of 16 per cent, with complete exem-ption for smallest companies that have been owned for five years or more. No tax to pay on sales of taxpayer's main home and individual households are entitled to ¿€15,000 of tax-free gains each year. On gains above ¿€15,000, individuals pay 27 per cent CGT.

GERMANY

Individuals pay no CGT on shares held for a year or more, but tax is due on 50 per cent of the gain on shorter-term holdings at the taxpayer's highest marginal rate of income tax, currently up to 45 per cent. Principal private residences are not liable for tax.

AUSTRALIA

Capital gains on equities and business assets are taxable at taxpayer's highest marginal rate of income tax – the top rate is 45 per cent – with 50 per cent of the gain discounted for assets held for more than one year. Gains on taxpayer's main residence are tax-free.

CANADA

Gains on most personal and business assets are taxable at the taxpayer's highest marginal rate of income tax, but only on 50 per cent of the profit. Gains on taxpayer's principal private residence are tax-free.

JAPAN

Capital gains tax of 20 per cent to pay on most assets, including business assets, though a concessionary rate of 7 per cent applies to equities in the current tax year.