THE UNSEEMLY dash by owners of companies and other assets to beat the 5 April deadline for the capital gains tax changes introduced by Alistair Darling reached a crescendo last week.
This extraordinary flurry of mergers, acquisitions and other corporate finance activity, which started gathering momentum last autumn, was sparked by many business owners’ decision that, rather than plough on with running their own businesses merely to hand over more money to the Exchequer, they would rather sell out now.
The rush to sell or transfer assets ahead of yesterday’s deadline — when the minimum level of capital gains tax was raised from 10% to 18% — was epitomised by some nifty financial footwork by the Stagecoach founders, Brian Souter and his sister Ann Gloag.
The pair of devout Christians shifted 33 million of their Stagecoach shares into two discretionary trusts, of which they and other family members are beneficiaries.
Gloag also offloaded a further 500,000 shares in the Perth-based bus and train group that she co-founded with her brother in 1980 into a trust in the name of her husband, David McLeary. Overall, the shares transferred by Souter and Gloag are worth £82 million at today’s market prices, and tax experts are convinced that the timing of the share transfers was no coincidence.
Another prominent figure who last week cashed in ahead of the 5 April deadline was Clara Furse, chief executive of the London Stock Exchange. The Canadian-born Dutchwoman sold more than 425,000 LSE shares, while her husband purchased the exact same number. It is thought that the move will shave £400,000 off Furse’s tax bill. She followed the likes of inventor and entrepreneur James Dyson, supermarket tycoon Sir Ken Morrison and Pret à Manger founders Julian Metcalfe and Sinclair Beecham.
However, the deeply unpopular tax rise — first announced by Chancellor Alistair Darling in his pre-Budget report in October 2007 and confirmed in last month’s Budget speech — has done more than persuade the super-rich to indulge in some fancy financial engineering.
It has also inspired entrepreneurs and company owners right across the Scottish and UK business and industrial spectrum to sell up – often to private equity and vulture funds.
This is supremely ironic.
Darling’s move, something that Gordon Brown baulked at introducing in his final Budget as chancellor in March 2007, was principally designed to shake an iron fist at the private equity industry.
Darling must have thought that the introduction of measures designed to ensure private equity firms paid more tax would go down well with those on the Labour left and in the trade union movement, who have criticised them as callous and greedy asset-strippers.
At the end of the day, however, Darling has inadvertently ended up helping the very people whose lives he was supposed to be hindering — the private equity sector.
This has happened because the glut of small and medium-sized enterprises coming on to the market in the past few months has made it much easier for private equity firms to pick up family-owned and other entrepreneurial firms for a song.
The sheer volume of businesses coming on to the market pre-5 April combined with the very urgency of yesterday’s deadline means that it has become a buyers’ market for companies in recent weeks. This is because, in their desperation to complete deals before the deadline, sellers will have been prepared to accept concessions demanded by purchasers, including knocking down the price, which wouldn’t otherwise have been countenanced.
The collateral damage is immense. It is well known that Darling has alienated a core business constituency with his revision of the UK’s capital gains tax system.
In the dim and distant past, it seemed Labour genuinely wanted to foster a culture of entrepreneurialism in the UK. Now that he has caused a tectonic shift in the ownership of British business — out of the hands of owner-managers and family dynasties and into the hands of larger businesses and private equity groups — that seems a hollow dream.
Darling’s unpopular move also had another unintended side-effect. In the short term, at least, it has been excellent news for Scotland’s battalion of lawyers, accountants and corporate finance advisers. In recent months professional services firms have been living in a state of suspended animation, as dealflow and other corporate finance activity was driven up by Darling’s tax changes.
It has temporarily shielded them from the worst effects of the credit crunch.
However, now that the mini-boom in mergers and acquisitions is over, Scotland’s professional services community is facing a reality check. Deal-making in Scotland can be expected to fall off a cliff, which will almost certainly necessitate redundancies at those firms that are heavily exposed to M&A, especially law firms and to a lesser extent accountants.
Longer-term winners from Darling’s introduction of a flat rate of capital gains tax include buy-to-let landlords. They have traditionally paid capital gains tax of between 24% and 40% whenever they sell a property.
However, this falls to 18% as of today. Industry experts believe this will spark a surge in property sales by buy-to-let investors, especially those with flats in neighbourhoods where property prices are expected to remain stagnant for some time, such as Glasgow Harbour and Leith Docks. The arrival of this glut of properties in an already shaky housing market is unwelcome and will depress house prices further.
Penalising entrepreneurs; undermining family-owned business; damaging the housing market; assisting private equity; and benefiting buy-to-let landlords. Surely this cannot have been what the MP for southwest Edinburgh had in mind when he concocted his CGT reforms?
One almost feels sorry for old Badger features. He thought he was going to win kudos by making life difficult for private equity investors. As it turns out — and it was largely because his CGT reforms were so ill-thought — they have had precisely the opposite effect.
This article was the main business comment in the Sunday Herald on 6 April 2008.