Pre-Budget Statement: Capital Gains Tax: Larger stake holders get extra relief

THE CHANCELLOR in effect doubled Capital Gains Tax (CGT) relief for individuals who invest in businesses, but left many smaller companies and venture capitalists complaining that he should have been far more radical.

In an attempt to encourage investment in entrepreneurial businesses, the Chancellor halved the period needed to qualify for CGT relief on certain types of investment in companies from 10 years to five.

Some investors, such as higher-rate income tax payers, can currently reduce their CGT bill from 40 per cent to 24 per cent if they hold on to the shares for 10 years. This reduction is "tapered" in annual stages in relation to how long the shares are held.

Yesterday the Chancellor proposed to shorten this "taper" so that people who invest for three years will reduce their CGT rate each year in 6 per cent steps from 40 per cent to 22 per cent. Those who hold on to the shares for five years will see their CGT rate reduced to 10 per cent.

The measures only apply to two types of investors - employees who own a stake of at least 5 per cent in their companies, and independent individuals who own a minimum of 25 per cent of the business. The Chancellor intends to "reduce substantially" these percentage thresholds for qualifying business assets.

The 10-year taper was introduced in April 1998 to boost investment in high-growth companies, but critics still say CGT is too complicated and punitive. Michael Jacobs, chairman of the share schemes committee at Cisco, the lobby group for 2,000 smaller quoted companies, said: "This is no help to us at all. There will be very, very few people who invest enough in quoted companies to qualify for this relief. Even 5 per cent of a company is a lot for an individual. The general public won't be helped at all."

Jonathan Clarke, chairman of the Taxation Committee at the British Venture Capital Association (BVCA), welcomed the Chancellor's move. "It improves a complex piece of legislation." He said he would prefer to see CGT abolished entirely, as it only raises pounds 3bn, a small sum relative to the total tax take and the problems it poses for small companies.

Mr Clarke disagreed with Cisco on the impact of the reforms, which he said "will make a big difference to the private individual investing in smaller private or quoted companies".

But he said the system remained too complex, a charge echoed by Alex Henderson, tax partner at Arthur Andersen. "The CGT system gives tax accountants a headache, never mind the poor businessman," said Mr Henderson.

Tony Hobman, chief executive of ProShare, the campaign group for wider share ownership, said the Chancellor's move was "a step in the right direction, but we're disappointed that he hasn't tackled the ludicrously low threshold for CGT of pounds 7,100."

Mr Hobman said: "At the moment you can enjoy capital growth on shares in a company up to pounds 7,100 before you start incurring CGT, which is nowhere near high enough if you want to encourage investing in hi-tech start-ups. ProShare wants this threshold raised to pounds 10,000 at least."

John Willcock