The Government was accused of introducing a stealth tax on small businesses yesterday by closing a concession aimed at entrepreneurs that was exploited by a small group of billionaire private equity bosses.

The Chancellor said that he would abolish so-called taper relief on capital gains tax - which allowed private equity firms to pay as little as 10 per cent tax on the bulk of their profits. But rather than make the rule specific to private equity, as many had been expecting, the Chancellor’s new 18 per cent tax rate will be applicable across the board.

The move will benefit landlords, second home owners and private investors who could pay substantially less tax on their capital gains.

Currently, higher rate taxpayers who sell a property that is not their main residence, or shares in companies listed on the main stock market - and make a profit of more than £9,200 - pay as much as 40 per cent tax on their profits if they sell within three years. After ten years, the effective rate of tax falls to 24 per cent. They will now just pay the 18 per cent flat rate.

Chris Sanger, head of tax policy at Ernst & Young, said: “This is the largest change to capital gains tax since Gordon Brown instituted taper relief a decade ago and fundamentally returns the tax system to where it started, albeit at a lower rate.”

Small businesses will be the losers under the new regime. Alex Henderson, a partner at Pricewaterhouse-Coopers said: “An entrepreneur who expected to pay 10 per cent on the business they’ve built up will now pay 18 per cent. It’s unhelpful that it’s such a broad brush measure. It could have been more targeted [at private equity].”

Taper relief was introduced by Mr Brown in one of his first acts as Chancellor as a way of encouraging enterprise. It emerged earlier this year that private equity firms - which buy companies using huge amounts of debt - were exploiting those rules to pay minuscule tax on the “carried interest”, or profits, that they made on their investments.

Mr Darling said that the abolition of taper relief was designed to make private equity “pay a fair share”. It is hoped that the measure will raise an additional £2 billion in taxes over the next three years.

The British Venture Capital Association criticised the move, saying that the 18 per cent tax rate meant that capital gains tax in Britain was now higher than in France, Italy or America. “The British private equity industry is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay.”

Other experts claimed that the measure would put more pressure on the private equity industry which is already suffering in the credit crunch.

Stephen Quest, a tax partner at Grant Thornton, said: “It is a major disincentive for private equity executives to take the risks they were currently taking, and a factor likely negatively to impact on the industry’s recruitment and retention rates.”

Peter Taylor, a partner at the private equity firm Duke Street, said it was fair that the measures hurt all businesses, not just private equity. “There’s nothing inherently different about private equity. We don’t get special treatment, so any change to the tax regime has to affect everyone.”

Adrian Beecroft, senior chief investment officer at Apax Partners, one of the world’s largest private equity firms, said that it was in the interests of the Chancellor not to punish private equity too harshly.

“There’s more benefit to keeping the private equity business here than there is in increasing the tax rate to a much higher level and as a result chasing the industry offshore,” he said.

However, private equity executives who come from abroad but live and work in Britain face a double blow after the Chancellor said he would tighten the rules on residence. Mr Darling proposes to count the days on which people arrive and leave the country as periods of residency. Individuals are considered to be resident if they have been in the country for 90 days in any one tax year.

Case study

Sue Hartfree, 57, is a self-employed landscape gardener. Her business has an annual turnover of less than £20,000. Sue’s husband, Paul, is an education consultant and a basic rate taxpayer.

They own their own home, worth about £270,000, with an outstanding mortgage of £70,000. Sue owns a van which she uses for the business.

She said: “When you are self-employed, everything seems to have an extra charge because it’s commercial. You are penalised for being a small business.”

She feels that the economy is better than ten years ago, but in the past year or so business has begun to deteriorate. Sue is not registered for VAT but is concerned that it won’t be very long before she has no choice and has to register.

Impact She will be better off by £316 from next April after changes to income tax

Verdict “There was nothing there to help me. I was hoping for a rise in the VAT threshold and a drop in fuel costs. The capital gains changes will not affect me. The simplification of the tax regime will not help, either. Small business is not encouraged. Everywhere you go, you are slapped down. I still don’t know who to vote for. They are all as bad as each other.” (Elizabeth Colman)

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