Legal & Finance: Reverse the Clampdown on Taxation

The Birmingham Post (England), December 2, 2005 | Go to article overview

Legal & Finance: Reverse the Clampdown on Taxation


The Chancellor should use Monday's Pre Budget Report to reverse the clampdown on taxation that is hitting private equity deals like management buyouts, it was claimed today.

Linda Marston-Weston, Birmingham-based transaction partner with accountants Ernst & Young, said in recent years there had been 'an unwelcome tax clampdown, with the potential to damage private equity deals across the board'.

The HM Revenue & Customs' hard line was affecting highly leveraged MBOs and secondary buyouts, which had seen a resurgence of activity over recent months.

'MBO teams often think that the growth in value of their shares will ultimately be taxed at an effective capital gains tax rate of ten per cent thanks to taper relief,' said Ms Marston-Weston.

'Unfortunately, gains on these shareholdings can now be reclassified as 'earnings from employment', thanks to a tightening of the rules for employee/director shareholders.

'Now, unless the shares are acquired at market value, income tax and national insurance will be payable at a rate of 41 per cent and the company may also have to pay employers' national insurance at 12.8 per cent

'Large figures can be involved, given the potential for MBOs to boost shareholder value in quite a short period of time, and what constitutes market value is a complex area in the context of employee/director shareholdings. This whole area requires careful consideration by tax advisers early in the deal process.'

Ms Marston Weston said the clampdown was also hitting secondary buyouts.

In a typical deal of this type, the existing private equity investors look to realise their stake, effectively to be replaced by another.

The new investor sets up a new company and, once it has been financed with a mixture of debt and equity, it will then buy out the existing shareholders, both the private equity backers and management. …

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