Private equity bosses and foreigners working in Britain who pay little tax were targeted by Alistair Darling in what was seen as a crackdown on the " super rich."
The Chancellor responded to growing criticism that the heads of private equity bosses were paying less tax than their cleaners by scrapping the 10 per cent level of tax that some pay and bringing in a 18 per cent flat rate of capital gains tax.
The move means there will be cuts in capital gains tax for people who sell second homes, currently taxed at 40 per cent, or shares, currently 22 per cent or 40 per cent. Ministers said this would appeal to the " aspirational classes" who were not among the "super rich" while simplifying the tax system.
The shake-up provoked criticism from business, which warned that other firms would be hit by the move against the private equity industry and the economy would suffer as a result.
The decision to target private equity bosses had been advertised for several months, but the moves against people working in Britain and claiming non-domicile status to avoid paying tax on their overseas income was seen as a response to the Conservative Party's plan to hit the "non doms" to fund their plan to cut inheritance tax.
Labour sources insisted Mr Darling's scheme was "already on the stocks" . But they said the Tory move had opened the door to Labour to target the very rich in a fairer way than the Opposition. Labour MPs hope the "new politics of the super rich" will allow the Brown government to hit this group even harder.
The Tories proposed an annual levy of £25,000 for all "non doms" but Mr Darling's favoured option is a £30,000 a year charge when people have lived in Britain for seven years, so that those working here for shorter periods are not caught. He also promised to close loopholes to prevent people claiming they are out of Britain when they are in the country and from disguising income as capital.
John Cridland, deputy director general of the CBI, said: "Changing capital gains tax rate to a flat rate of 18 per cent will adversely affect the balance between risk and reward, both for entrepreneurs and for the UK's vital private equity industry. This move is disappointing and may lead to a reduction in investment in start-up and growing businesses."
The Federation of Small Businesses said: "The pre-Budget report is bad news for small business, adding to the tax burden. The Chancellor's statement is a huge disappointment for most small businesses still reeling from the increase in corporation tax announced in the last Budget."
Paul Davies, UK head of tax for Ernst & Young, said: "We are extremely disappointed with these proposals as they threaten to undermine the entrepreneur culture that has blossomed over the past decade.
"Complete abolition of the taper removes a large incentive for entrepreneurs and challenges the Dragons' Den-type success of the UK. It also represents a fundamental retreat from his predecessor's key policy."
Brendan Barber, general secretary of the TUC, said: "We warmly welcome the Chancellor's recognition of the tax loopholes enjoyed by the super rich through both private equity and non-dom status – an issue that unions have put firmly on the agenda. But the Chancellor has only started the process of closing the loopholes today. It would have been far better to introduce a proper residence test than make the non-dom regime even more complex. We estimate this would quickly start to raise an extra £4bn a year."