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Tories and the super rich

• Robert Peston
• 23 Jun 07, 09:13 AM

George Osborne, the Tory Shadow Chancellor, has made common cause with the left of the Labour party and trade unionists by saying he is sceptical that the huge earnings of partners in top private equity firms is a proper capital gain, as most of us would understand it.

That has big implications. If it were translated into a reform of the tax system, these private-equity superstars would be liable for the top rate of income tax on all their earnings.

They would no longer benefit from the low 10 per cent capital-gains-tax rate introduced by Gordon Brown to encourage risk-taking entrepreneurialism.

Osborne's concern is that the partners in private equity firms put only a tiny amount of their own equity (their own money) into these deals. Most of the equity in these deals comes from outside investors (pension funds, or wealthy individuals), not from them.

But for a tiny equity investment, they reap 20 per cent of the gains from these deals (known as the carry) but are liable to the tiny 10 per cent capital gains tax rate (if they pay any tax in the UK at all, which many don't).

For Osborne, this carry looks very much like a City bonus, rather than a capital gain for risk taking. Which is why he thinks they should probably pay income tax on these gains.

If all this were taxed at the 40 per cent top-rate of income tax as George Obsorne suggests, they would have to pay millions of pounds in additional tax - except that many of them would immediately take steps to become tax exiles.

Which is why it may make more sense to do what the private-equity veteran, John Moulton, said this morning, which is to overhaul and simplify the entire capital-gains-tax system, rather than penalising the partners of the big private equity firms as a special case.

However what's striking is that the Tory shadow chancellor has been much more explicit that the private-equity superstars are not paying enough tax than the soon-to-be prime minister, Gordon Brown.

Which only goes to show that in these confusing days when the old left-right political divisions are blurred, concern that the super-rich should pay their way exercises many Tories quite as much as Labour supporters.

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