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Tax tests

Chris Salih looks at New Star’s heart of Africa fund and says that while the continent has grown in investment stature, advisers may not be completely sold on it

What a week. The new Chancellor’s first pre-Budget statement certainly threw the cat among the pigeons. Aside from the obfuscation over inheritance tax, simplifying capital gains tax has ended up as a highly controversial move.

Ostensibly directed at the dual targets of private equity operators and the highly complex nature of the tax, with indexation and taper relief combining to complicate tax calculations, it caught entrepreneurs in the crossfire. Howls of protest emerged from bodies representing business interests. As one commentator on a financial programme remarked the morning after, at best it represents an 80 per cent increase in the tax rate but for some the rise is nearly fourfold.

Of course, the Chancellor has little choice but to raise revenue from somewhere. Not only is the tax take suffering from a slowing economy and a reduction in City profits and bonuses, public expenditure has been rising, too. An examination of the data supporting the statement suggests it is as creative a piece of presentation as you are ever likely to find from a government department. For a start, it assumes the economy will rebound rapidly from the current downturn. I hope he is right but he cannot be certain.

As it happened, last week, I was charged with giving two very separate audiences my take on what the future might hold straight after the Chancellor’s statement. In Scotland, it was to IFAs my comments were directed. In East Anglia, solicitors and private investors were the ones on the receiving end of both me and a tax expert whose subject was – you’ve guessed it – capital taxes.

For me, the real issues were the lingering effects of the credit crunch, the return of the appetite for risk and whither the US economy. If I had had my wits about me, I might also have touched upon the opportunities thrown up by tinkering with the tax system.

Successive chancellors have introduced taxes which have fallen into the “unintended consequences” category of assessment. Nigel Lawson’s ending of mortgage interest relief for couples produced an upward spike in house prices and paved the way for the bear market in property that ensued. The introduction of a selective employment tax more years ago than I care to recall led to a rise in unemployment as companies reassessed their staffing needs.

Capital gains tax itself has been responsible for creating artificial conditions in markets. When we had a shortand a long-term CGT regime – with the short-term rate at the highest level of income tax, which for many was penal at the time – sales of shares would be delayed so that the higher tax was avoided.

Imagine, then, what the attitude of some of Britain’s more successful entrepreneurs who retain significant stakes in the businesses they formed might be. There are plenty of companies where the shares available to be sold to take advantage of a 10 per cent tax rate – which will still be applicable until April next year – represent a large percentage of the market capital. Should we be on the lookout for a resurgence of directors share sales and avoid these companies or view the tax change as a potential opportunity?

While there is no guarantee there will be a rush for the exit before the new rates come in, it must be very tempting to save the 8 per cent extra tax that will become due on what could be a very substantial sum of money. This clearly has more implications for smaller and mid-cap companies than for the market leaders. And it is yet another reason to concentrate on the top end of the market although there remains every sign that investor appetite for risk has returned. It all makes we wonder what it is I have missed in my assessment of likely market progress.

Brian Tora ( is principal of The Tora Partnership


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