The decision to near double tax paid on selling a business has been likened to a misguided missile.
Oh, what a nasty shock! With the tiniest of technical tinkerings to the tax system, the new Chancellor has nearly doubled the cost of selling your life's work.
Although the ending of taper relief on Capital Gain Tax sounds like a rather small adjustment, Alistair Darling's decision in his Pre-Budget Report has caused huge consternation among both owner managers and their financial advisers.
Linda Marston-Weston, transaction tax partner at Ernst & Young, says: "A lot of ordinary business people feel very betrayed by this. The Chancellor was trying to get a small number of big venture capitalists who have been criticised so much, but the people it's really hit are ordinary owner managers. It's been a sledgehammer to crack a nut."
Derek Proctor, regional director at HSBC Private Bank, adds: "I'm not sure the Chancellor intended to hit hard-working entrepreneurs, but that's been the effect. The people it's really hurt are those who have spent years trying to build a business and hoped to sell it and enjoy a retirement on the proceeds. We're not talking high-flying City types but people running double glazing firms and crxe8ches. They could accept the previous arrangements as fair, but the new regime simply isn't."
The effects of Darling's changes go something like this. For the past ten years capital gains tax (CGT) has been tapered - that is, it is reduced over time, for high earners, from 40 per cent to 10 per cent the longer an asset is held before being realised.
Initially that gradual reduction was over four years, although it was reduced to two a few years ago.
What the Chancellor has done - and the fine details were yet to be published as Insider went to press - is abolish both the taper and time period. From April 2008 people selling stakes in their business will have to give 18 per cent of the proceeds to the government, irrespective of how long it has been held.
What does that mean in practice?
As with all tax issues it is rarely simple (see box) but in effect an owner manager who sells his business for £34m before 6 April, when the new system comes in, will pay CGT of £3400,000. After that date the Chancellor will be able to claim £3720,000 - a hefty rise.
Indeed the changes could hit those who have already sold their businesses: the new rate of CGT will apply if they sold their business but deferred part of the payment with loan notes. Again this will hit small business people harder and, in effect, penalise them for helping out former colleagues, as loan notes are frequently used in management buyouts.
If that hurts, then consider the case of the owner's PA on a share save scheme. For her CGT after taper was being paid at five per cent. Now she too will have to pay the full 18 per cent. Marston-Weston says "that means the tax on her little nest egg has gone up by 360 per cent.
It is generally assumed that Darling was trying to achieve two things with the change. One was to simplify the tax system - Tolley's, the tax advisers' bible, has doubled in size in recent years. The second was to hit the big, big venture capitalists that have drawn the ire of Labour's left.
So is everyone in business a loser? Well, not quite. The changes in the tax system are of a massive benefit to those who have invested in non-business assets, like buy-to-let properties. Under the old system their tax bill on selling the asset gradually fell from 40 per cent to 24 per cent over ten years. Now, in an almost "straight to go" move on the Monopoly board, they pay just 18 per cent almost immediately.
Graham Apperley, tax adviser at Horwath Clark Whitehill, says: "At the present time, private investors who sell a "buy to let' property or a second home, were faced with CGT bills of anywhere between 20 per cent and 40 per cent, dependent on their length of ownership.
"They will now be able to look forward to a substantially lower tax bill if they sell after April 2008. It'll be interesting to see if there's a noticeable impact on the property markets following this news."
Apperley also believes the changes will benefit many wealthy individuals holding onto large company shareholdings where the size of prospective tax bills stopped them turning shares into cash.
So much for the changes, but what can business owners legally do to offset the tax shock? Some experts have suggested that for those already considering a sale, but unable to complete by the April deadline, it might be able to negotiate irrevocable undertakings with the purchaser, meaning the deal is done now therefore gaining taper relief, although the money changes hands at a later date.
Stephanie Churchill, senior tax manager at Grant Thornton, says it is still possible to "bank' indexation allowance and taper relief without selling shares, although the path is not straight forward.
She adds: "The planning requires a gift of shares into a separate entity, probably a trust. This will trigger a capital gain, so taper relief will be given, as will indexation. Any growth in value going forward will then be taxed at 18 per cent.
"However, there are also downsides to this. CGT will have to be paid up front and it'll also be necessary to take professional advice due to the complexities involved."
Or you could simply give Britain up as a bad job.
Trevor Cox, senior tax manager at Smith & Williamson, adds: "Transferring assets to a trust creates a disposal for CGT. It should be remembered that transfers to most trusts are immediately chargeable to Inheritance Tax (IHT), and could create a 20 per cent IHT charge to the extent that the value transferred exceeds the nil rate band, unless covered by a relief or exemption.
"Because it's the contract date, rather than the completion date, that establishes the disposal date for CGT, a sale could be structured to defer both the completion and consideration until 5 April 2008. The contract should not be a conditional one, however, as this will defer the disposal date."
Marc Abrams of Tenon says: "It is possible that some people may go overseas. In the past people took advantage of favourable regimes abroad. If you go offshore and then make a gain but don't come back in five to six years the gain isn't taxable. There were some countries with which the UK had more favourable tax agreements and where you could go for a shorter period, but those provisions were tightened up in the 2005 budget, I can't see many people going offshore now. I'm afraid this is one most people selling a business will simply have to face."
Kurt Jacobs reports