Tax changes leave entrepreneurs out of pocket
Changes to capital gains tax announced in Alistair Darling’s Pre-Budget Report will leave entrepreneurs out of pocket in retirement, Britain’s largest small business organisation warned.
The Federation of Small Businesses called on the Chancellor to suspend the planned change - due to come into effect in April 2008 - to allow time for consultations with those most likely to be affected.
The decision to abolish taper relief on capital gains tax has triggered protests from business, unions and opposition parties, who argue it will hit small businesses rather than the private equity firms it was designed to target.
Removal of the relief means that tax on the profits from the sale of assets, currently as low as 10% for many small businesses, will be charged at a flat rate of 18%.
The FSB warned that this will slash the sale value of a business when its owner comes to retire.
Many entrepreneurs regard their business as their pension plan, and aim to live off the proceeds of its sale when they reach retirement age. They now face an 80% increase in the amount they are expected to hand over to the taxman, leaving a smaller pot for them to live off.
An FSB spokesman said: “Many business owners, who started from scratch and worked long hours at considerable personal financial risk, were depending on the sale of their business to fund their retirement.
“With the increase in CGT from 10% to 18%, these business owners will see a lower return on their investment. This comes on top of the removal of tax relief on share dividends in 1997 that did a great deal of harm to pension provision in the UK.”
Even though the change does not come into effect until April 2008, the FSB warned that Mr Darling’s decision will hit business people selling up before then, as potential buyers are likely to seek a discount in the knowledge that the alternative to an immediate sale is a larger tax bill later on.
FSB national chairman John Wright said: “The Chancellor should suspend this proposal until full consultation with business groups has been held to radically alter and improve upon this disastrous proposal.”