PRINT THIS PAGE The UK's pre-budget report from SJ Berwin10/10/2007. Source: SJ Berwin. Simon Witney 
On Tuesday 9 October, the UK's new Chancellor of the Exchequer, Alistair Darling, delivered his first set-piece, the 2007 Pre-Budget Report and Comprehensive Spending Review. In a break with the pattern established in recent years by Mr Darling's predecessor, Gordon Brown, now the UK's Prime Minister, the pre-budget report was delivered at short notice, early in the autumn, and immediately followed the ending of speculation as to whether there would be an autumn general election, says SJ Berwin. As ever, the devil will be in the detail, and the exact nature of the proposals made by the Chancellor will not be known until next spring, when he will present his first Budget, and which will be followed by draft legislation in the Finance Bill.
For the private equity industry, the points of greatest interest were as follows:
1. There were no changes specific to private equity, although the Government has said that "it remains interested in wider aspects of the ways in which those involved in private equity and other industries are rewarded, including the application of legislation on employment related securities".
2. There is to be no change to the rules applying to shareholder debt in leveraged private equity deals, which only came fully into force earlier this year, although this is another area which the Government will continue to monitor.
3. Taper relief (for both business and non-business assets) is to be abolished for gains on all disposals made on or after 6 April 2008 by individuals, trustees and personal representatives (and not just in respect of carried interest).
4. A flat rate of capital gains tax of 18% is being introduced from 6 April 2008. The BVCA in its response to the pre-budget report, has pointed out that this is a higher rate than is typically charged on carried interest in France (16%), Italy (12.5%) or the US (15%).
5. Not specifically relating to private equity, although private equity executives were mentioned by the Chancellor in this context, the Government is changing the rules on residence and domicile, after a review lasting several years. There will be consultation on the detail of the proposals, but the main thrust is that from April 2008, individuals who are resident but not domiciled in the UK and who have been in the UK for seven out of the past ten years will only be entitled to the remittance basis of taxation (under which they only pay UK tax on income and gains which are brought into the UK) if they pay an annual tax charge of £30,000 a year (in addition to the UK tax which they pay on their remitted income). If an individual decides not to be taxed on the remittance basis (and not to pay the £30,000 charge), they will be taxed in the UK on their worldwide income and gains whether or not these are remitted to the UK. The new rules are retrospective to the extent that, when they come into force on 6 April 2008, all previous years of residence will be taken into account. For example, a non-UK domiciled individual who has been UK resident for 5 years in April 2008 will only be able to claim the remittance basis of taxation for two further tax years before they will have to pay the £30,000 annual charge (or be taxed on a worldwide basis).
6. In determining whether an individual is resident in the UK for tax purposes, the UK tax authorities will, from 6 April 2008, take into account days of arrival in and departure from the UK. This marks a change from current practice, under which an individual who arrives in the UK on the morning of day 1, who spends the whole of the following day in the UK and who then departs on the day after that would be treated as having spent only one day in the UK. Under the new rules, such a person will be treated as having spent three days in the UK.
7. Finally, a number of current 'anomalies' in the remittance basis of taxation which have applied to UK resident but non-domiciled individuals will be removed with effect from 6 April 2008. The detail of these is not yet clear, but the Government's intention is to reduce the scope for alienation of income and gains through the use of offshore structures such as companies and trusts. Under the current rules applying to offshore trusts, payments can be made to non-UK domiciled beneficiaries free of UK tax. The changes could mean that such tax treatment will no longer be possible.
The package of proposals announced by the Chancellor contains a number of significant changes and although none were specifically targeted at private equity, many of them will have an important effect on the industry.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on its services to the private equity industry please contact Jonathan Blake or Simon Witney in its London office +44 (0)20 7533 2222 or visit our website at www.sjberwin.com
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