Darling's private equity plans give AIM investors sleepless nights

Rumours that chancellor Alistair Darling is preparing to extend the taper
relief period from two to five years have sparked fears that London’s popular
AIM market could face hundreds of millions of pounds in additional taxes.

Word in the City is that Darling is preparing to lengthen the taper relief
period to appease unions and politicians who have criticised the use of the
system by private equity funds that have exited investments after only two years
to take advantage of generous tax breaks.

It has been suggested that the reason Darling and Treasury officials, who
have been conducting a review of private equity taxation, have considered
extending the taper relief period to five years is to ensure private equity
investors take a longer term view on managing portfolios.

Reforming taper relief rules for private equity investors, however, could
have unintended consequences for the performance of AIM shares, which also
attract taper relief.

Derek Murphy, a tax partner at UHY Hacker Young, has warned that in the worst
case scenario AIM investors could suffer a £1.4bn additional tax burden if the
relief period is extended.

UHY Hacker Young reached the £1.4bn figure by calculating AIM’s capital
growth over the past three years and using it to forecast what the market could
be worth in three years time.

The firm then worked out how much tax investors would have to pay if they
sold shares inside five years and missed out on taper relief.

Murphy said it would be difficult to shield AIM from any taper relief
extensions if the proposal to lengthen the period does go ahead.

‘You could possibly apply the rules to private equity only, but there are
clever people in the market who would find a way to move from one regime into
another.

‘If the taper relief period is extended it will have to be extended across
the board,’ Murphy said.