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No tax please, we're City-ish

No-one likes paying tax. And those of us on modest incomes always suspect that the rich somehow manage to avoid it, writes Paul Lewis

Normally the wealthy keep very quiet about how they achieve that. But this week one of the new breed of capitalists has confirmed that many of his colleagues pay "less tax than a cleaning lady". Despite having riches beyond the dreams of Croesus, he confirmed they pay just 10 per cent tax on their income.

Top capitalist Nicholas Ferguson went on to condemn this tax avoidance. "Any common sense person would say that a highly paid private equity executive paying less tax than a cleaning lady…can't be right."

The 'private equity' people he is talking about are the successors to the asset strippers of the Sixties. Buy a business. Sell the assets it does not need. Close its pension scheme. Get rid of the dead wood. And in two years sell it for twice what you paid. Today it is called 'private equity'; Mr Ferguson and others say it is a Good Thing and overall creates jobs. Whether it does or not the executives, who have bought the business largely with borrowed money, pocket the profit. Then comes the tax trick.

These profits are classed not as income but as capital gains. Due to changes introduced to help struggling businesses in 2002, as long as they keep their shares in the business for two years the rate of CGT drops from the normal 40% to just 10%. Someone who earns a million pounds a year – an amount many of them would scoff at – saves more than £300,000 a year in tax. Kerching!

The 10% rate they pay is the same as the starting rate paid not only by low paid cleaning ladies but by many pensioners with an income from pension and savings of less than £7455 a year. Some private equity directors earn that much every day.

Nicholas Ferguson is chairman of one of the top private equity companies and his comments shocked the City and galvanised unions into demanding changes in the rules when Gordon Brown becomes Prime Minister.

But hang on a minute, chaps. Who said these words when he presented Budget of 2002? "And for business assets held for more than two years, capital gains tax will be cut to 10 per cent." Surname Brown. First name Gordon. Could he and the future PM be one and the same? And perhaps the same Gordon Brown who next year is doubling the starting rate of tax for low income pensioners from 10% to 20%. Perhaps he could at least do the same for the tax paid by private equity executives. Otherwise next year they'll be paying even less tax than a cleaning lady. Kerching!

This article was created: 6 June 2007.
This article was last edited: 6 June 2007.

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Paul Lewis

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No tax please, we're City-ish