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A speculator's budget?

• Robert Peston
• 9 Oct 07, 04:43 PM

Although many will see the reform of capital gains tax as an attempt to force the mega-bucks earners of private equity to pay more tax, its signficance goes well beyond that.

There will now be a single rate of capital gains tax at 18 per cent.

When John Major was prime minister in the 1990s, that would have been seen as the very epitome of a pro-capitalist reform.

But Gordon Brown when he was chancellor reformed the system so that many entrepreneurs and business creators now pay only 10 per cent tax, so long as they hang on to the relevant assets for a couple of years.

So for them, and private equity, this reform represents a steep tax rise.

However for many ordinary investors in the stock market or property, there will be a big cut in capital gains tax.

They currently pay up to 40 per cent tax on their capital gains, and that will now fall to 18 per cent.

But, interestingly, the gains are greatest for speculators, those who don't hold on to their assets for more than a few days or months.

The net impact of all this is to raise money for the Treasury - as much as £900m by 2010.

That probably tells you all you need to know - that most businesses will complain and see the change as anti-business.

And who knows what behavioural changes it will bring about? With the flat rate of capital gains tax now so different from the top rate of income tax, there's a huge new incentive for many of us to trade in shares and other property - at a time when there may be a bit of a bubble in these markets.

UPDATE 19:30 There was a firestorm of outrage earlier this year when it became widely know that private-equity executives pay tax at 10 per cent or less on rewards that may run to millions of pounds in a single year. Today's capital gains tax reform will push up the tax payable by some of these.

How many multi-million private-equity earners will be affected? On my reckoning perhaps 30 or 40, in a good year.

But there will also be an 80 per cent tax increase in the tax taken from hundreds of thousands of creators of small businesses, as and when they sell their businesses.

These entrepreneurs are the real dynamos of the economy. Should they really be penalised to ensure that a few private-equity plutocrats pay more to the Exchequer? Some will see that as profoundly unjust.

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Simple... and familiar

• Robert Peston
• 9 Oct 07, 03:56 PM

There are a couple of eye-catching measures of significance for investment and business in the pre-Budget report.

The first and most important is a simplification of capital gains tax. And it seems to be a bold simplification. It looks as though there will be a single CGT rate of 18 per cent. No more tapers depending on how long assets are hold. No more distinction between so-called "business" assets and non-business assets. Just a single rate of 18 per cent.

That would be a great benefit to most people who buy and sell shares or other assets. But it will mean that private equity and those who own shares in their own companies will pay a higher rate of tax - because the 10 per cent rate for them, payable if they hold their assets for two years, will go.

Anyway, don't get carried away with excitement. It is a tax raising measure - and will raise between £700m and £800m a year.

There will also be an attempt to raise more money from those allegedly wealthy people who classify themselves either as non-domiciled or non-resident. Non-doms who have lived here for more than seven years will pay a flat rate of £30,000 for the privilege of being non dom.

If that looks familiar, it is. George Osborne, the shadow chancellor, proposed something very similar (though he thought it would raise significantly more than the Treasury claims).

The reason for excluding those who have lived here for less than seven years is not to scare away the bright foreign bankers who come to the City for a few years and then go elsewhere.

And there appears to be bad news for the separate category of non-residents, who arrive on a Monday and jet back to Monaco or some other tax haven on a Friday, in order to minimise tax payable here.

The day they travel will now count as a whole day in the UK, which means they will be able to stay in the UK for much less time than hitherto if they want to preserve their privileged tax status.

I imagine that Sir Philip Green, who does the Monday to Friday commute, may feel a bit grumpy, as will others of the Monaco set.

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FSA v Bank of England

• Robert Peston
• 9 Oct 07, 11:52 AM

The chief executive of the , Hector Sants, has just dumped on the Bank of England in an extraordinary way.

He has told the Treasury Select Committee that the crisis at Northern Rock could have been avoided if the Bank had pumped additional liquidity into the banking market.

In a way, it is a statement of the bloomin’ obvious.

But it is nonetheless highly embarrassing for the Bank to be put on the spot like this by the City watchdog – which has joint responsibility with the Bank and the Treasury for preventing financial crises.

Nor can the Bank take any comfort from the refusal of the chairman of the FSA, Sir Callum McCarthy, to disclose to the Committee whether he urged the Bank of England to provide such additional funds to the banking market.

McCarthy’s silence appeared to be eloquent testimony to a major policy rift with the Bank.

It is very difficult to see how the collegiate, tripartite system of Bank, Treasury and FSA for steering the City through storms can survive such tensions.

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Rock buys time

• Robert Peston
• 9 Oct 07, 10:01 AM

There has been a disturbing outbreak of common sense at the Treasury. It has that it will provide Northern Rock with the kind of stable funding and protection for depositors that should allow the bank’s board to avoid selling the business at a knockdown price in a fire sale.

In fact, Northern Rock now has till February 2008 to decide whether it makes sense to sell itself. It’s odds on that the bank will be sold, but at least the Rock now has the time to judge the seriousness of the multiple expressions of interest it has received from putative buyers.

The Treasury’s big decision – made after consulting the Bank of England and the Financial Services Authority – is to provide full protection for all retail deposits made at Northern Rock after September 19.

This probably makes Northern Rock the very safest place for anyone to put their cash in these uncertain times.

If such succour turns out to be controversial, it will be because Northern Rock’s competitors – especially the smaller banks like Alliance & Leicester and Bradford & Bingley – may feel that the Rock has now obtained an unfair advantage.

Why would anyone not put their cash into Northern Rock right now, unless it starts paying a dreadfully low interest rate? Whatever today’s pre-budget report discloses today about a deterioration in the public sector finances, Northern Rock’s guarantor, HMG, is not going bust.

Now Northern Rock is paying an arrangement fee to the Treasury for this insurance, which will remain in place until normal market conditions resume.

And it would also pay to the Bank of England a small percentage of any new deposits it takes – in order to deter it from offering a crazily attractive interest rate to woo customers.

But whatever that arrangement fee and payment to the Bank of England turn out to be, they are by definition not commercial terms for the insurance – for the simple reason that Northern Rock simply could not obtain such insurance in the marketplace.

So in the interests of maintaining a level playing field for banks, I wonder if the Treasury would be able to refuse to provide the same insurance on the same terms to other banks, if they demanded it.

The Treasury says it would turn them down – unless they were in dire straits.

And I guess no bank would want to admit it needed such state insurance, because that would be a dangerous admission of fragility which would alarm customers.

Even so, it is plausible that the protection for Northern Rock constitutes unfair state aid, of the sorted prohibited by the EU.

Also agreed today is a widening in the range of collateral Northern Rock can pledge to the Bank of England in return for the emergency loans it is drawing for the Bank.

This has been done to help Northern Rock take advantage of the £10bn or so of commercial funding on offer from Citigroup, the world’s biggest bank.

At the moment, the Rock cannot borrow from Citi or any other commercial lender who may make funds available, because the Bank has taken a charge over all Northern Rock’s prime assets.

But now that the Bank has agreed to lend against the security of assets of lower quality, the Rock can pledge the better stuff to Citi.

It all means that – with copious state support – Northern Rock can plot a course towards perhaps becoming a normal commercial operation again one day.

This won’t happen overnight. As of now, it has borrowed almost £11bn from the Bank of England in emergency support. And it may be forced to borrow another £10bn or so from the Bank in coming months, as its existing liabilities come up for renewal.

That said, Northern Rock’s shareholders can breathe a small sigh of relief that the Treasury is no longer trying to get the troubled bank off its books at a speed that would squish the value of its equity to zero.

However don’t be fooled into thinking the rescue is without very serious costs for Northern Rock and its owners. There will be an incremental one-off charge of up to £50m in the results for the year to December 31 just in respect of an indemnity to pay all costs incurred by the Treasury, the Bank of England and the Financial Services Authority in respect of their work on Northern Rock, plus the pickings of the Rock’s own advisers.

And that hit to profits does not include any of the punitive interest charge levied by the Bank of England.

Make no mistake, the Rock’s shareholders are paying a very steep price for the crisis at their institution.

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