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Brown To Remove Tax Relief For Private Equity

by Jason Gorringe,, London

27 September 2007

UK Prime Minister Gordon Brown has given the clearest indication yet that he wants to change the tax system so that private equity firms cannot take advantage of lower rates of capital gains tax.

In a question an answer session at the Labour Party conference on Wednesday, when asked by a trade union member about the issue of private equity taxation, he responded that: "private equity will be dealt with" in the pre-Budget announcement in December 2007.

"That matter will be looked at in a few days and weeks and wherever there is a loophole that there should not be, we will take action," Brown stated.

"I may say that since 1997 we have closed a massive number of loopholes where they exist. Sometimes it is very difficult to do so because there are lawyers and accountants who are always trying to find loopholes. On this issue of private equity, I can assure you that we will do so," he asserted.

Trade unions and many Labour members, including those in parliament, have become increasingly outraged at a succession of recent headlines alleging that wealthy private equity bosses are taking advantage of taper relief rules, designed to encourage companies to re-invest, to pay little tax on their investment gains, known as carried interest.

Under recent changes to taper relief rules, companies can pay capital gains tax at 10% instead of the normal rate of 40% if assets are held for at least two years. These changes were, somewhat ironically, brought about when Brown was Chancellor of the Exchequer.

Until recently, the government has shown little inclination to close this perceived loophole. Indeed, new Chancellor Alistair Darling all but ruled it out in an interview with the Financial Times in July, when he said that the government should "be very, very wary indeed of a knee-jerk reaction or a reaction to a day’s headlines" that could ultimately erode UK competitiveness.

For its part, the private equity industry, represented by the British Venture Capital Association, has argued that private equity fund partners are entitled to taper relief since they are making substantial long-term investments in the companies and other assets they acquire, and has warned that shutting off taper relief would lead to an offshore-bound exodus.

The BVCA stated this week that it was "very concerned" about Brown's plans. Speaking at an industry conference, Wol Kolade said that the industry was "vital to the British economy" and contributed GBP26 billion in taxes last year.

However, with the prospect of a snap election round the corner as Brown seeks to cash in on his early popularity as Prime Minister, the move could be a very popular one with the unions and the voting public.

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