Investors in Aim companies are likely to lose favourable tax treatment along with private equity bosses, says Derek Murphy, a tax partner at accountant UHY Hacker Young. Reports began circulating on Friday (17 August) that chancellor Alistair Darling will crack down on the huge tax savings made by private equity players.

Like anyone buying unlisted shares, private equity managers who take personal stakes, or ‘carried interests’ in investments, get 75% relief on capital gains tax, only paying 10%, as opposed to 40%, after two years. It is said Darling is also considering reducing the maximum relief to 50% (20% tax) and that shares need to be held for five years.

While there has been talk of a two-tier system, one for private equity managers and the other for smaller investors, Murphy believes this will create too many complications, prompting a whole new element to the tax evasion business: ‘I think if there is a change it is likely to be across the board.’ However, he does add that the reduction in relief to 50% is unlikely. ‘While I think it’s possible I think only the qualifying period will be extended.’

Indeed, one of the criticisms of the current two-year qualifying period is that, with such a short time-frame, private equity players can take nominal salaries and count their carried interests as the main source of income, in effect reducing their income tax bill from 40% to 10%.

The government would usually officially announce tax changes at the pre-budget report in November/

December but Murphy believes an earlier announcement is needed to prevent investors’ selling Aim shares en-masse. possibly depressing the market.

‘Every year I get asked by clients in October and November whether they should sell their shares ahead of the report,’ says Murphy, who estimates the lost tax savings of a move to five years to individual investors could be £1.4 billion. ‘What people may do is get out now and crystalise gains so they know for sure what the tax liability is.’