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Mother of all U-turns

• Robert Peston
• 11 Oct 07, 09:41 AM

Throughout the 1990s, Gordon Brown 鈥� as shadow chancellor and then chancellor 鈥� banged on about the need to end Britain鈥檚 short-term investment culture at breakfast, lunch, tea and high tea.

As someone who strayed into his path a good deal, his puritanical and laudable determination to find a way of rewarding those who take a long-term approach to wealth creation became familiar (not to say wearing). And he succeeded in creating one of the most benign tax environments of any developed economy for those who were prepared to stake their livelihoods on creating a living, breathing enterprise.

So 鈥� as you may have gathered from earlier blogs (here and here) 鈥� I was shocked on Tuesday when his successor at No 11, Alistair Darling, abolished so-called taper relief for capital gains tax.

Taper relief meant that those who hold on to assets for longer payer a lower rate of capital gains tax when they sell the relevant assets.

In other words, whether you build a business up over 30 years and then dispose of all or part of it, or whether you buy a bunch of shares at 9am and then sell them at a fat profit at 10am, you鈥檒l now pay exactly the same 18% rate of tax.

And, what鈥檚 even more extraordinary, Darling cut the tax payable by most speculators by more than half while increasing the tax payable by genuine wealth creators by 80%.

This is the equivalent of the Treasury saying 鈥渓et鈥檚 turn the UK into a hedge-fund paradise, where the biggest rewards go to those who search out the easiest short-term profits鈥�. It鈥檚 a really odd signal for the government to send out.

And those who鈥檒l be punished by the tax change also include hundreds of thousands of individuals in Save as You Earn company share schemes. They currently pay 5% or 10% tax when they sell the shares they accumulate (depending on the marginal rate of income tax they pay). But that鈥檒l rise to 18%.

It effectively sounds the death knell for such schemes, which have been a great boon in aligning the interests of employees with their employers.

All that being said, many will say hooray that Darling should wish to simplify the capital gains tax system. I can see why he thinks that having a single 18% rate, with no tapers and no discrimination between any kind of investment, should be attractive.

Such simplicity is incredibly attractive and desirable. But it is being acquired at a steep cost for what may turn out to be millions of employers and employees 鈥� the entrepreneurs and employee shareholders 鈥� whose determination and morale are vital to all our economic futures.

All of which is to say that business pressure for a re-think will not abate. And if Gordon Brown doesn鈥檛 move fast, he may find himself under attack from the business leaders whose endorsement matters so much to him.

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