Private equity tax loopholes tightened

LONDON (Reuters) - Chancellor Alistair Darling on Tuesday proposed tightening private equity tax loopholes by enacting a single 18 percent capital gains tax and ending a scheme that allows many to pay a lower rate.

The changes, announced in the pre-Budget report, would double the capital gains tax charged on business asset investments from 10 percent. They would generate an extra 350 million pounds of revenue in the first year and 900 million by 2010-11, the government estimated.

Both critics of the existing scheme and those who benefit from it were unhappy with the Labour government's proposal.

Unions said the changes did not go far enough, buyout firms questioned the need for the change and small businesses said they would be unfairly affected by it.

Private equity chiefs have come under fire this year -- during a record buying spree of companies including pharmacy chain owner Alliance Boots -- for paying the lower tax rate applied to capital gains for businesses owned for at least two years instead of the higher 40 percent income tax.

"So from April next year I will withdraw the capital gains tax taper relief, and in its place there will be just one rate of 18 percent -- one of the most competitive single rates of any major economy," Darling said.

"The changes I propose ... taken together with the tax loopholes that I am closing will ensure that those working in private equity pay a fair share," he told parliament.

The government announced a review into the matter earlier in the year after unions lambasted buyout bosses for paying a lower tax rate than their cleaners.

The system of taper relief was introduced less than a decade ago by Prime Minister Gordon Brown during his tenure as finance minister as a way of encouraging investment. The original rule applied to investments held for many years, but the term was reduced to just two years in 2002.