It has been reported in the news this week that the Government is considering raising the Capital Gains Tax (CGT) rates in the Autumn Budget later this month. This could be one of the numerous measures that Chancellor Rachel Reeves will use to raise revenues in Labour’s first Budget.
This week, an open letter from The Entrepreneurs Network to the Government has been signed by 500 businesses who have warned that any hikes to CGT will be detrimental to the economy, in particular, the startup ecosystem.
Businesses state the raises to CGT would deter entrepreneurs and founders from wanting to grow a business in the UK, as the taxes will be too high when they come to sell their stake or future shares in the business.
The letter stated, “It would mean the UK has the second-highest CGT rate in Europe, and jeopardise the success of our country’s startup ecosystem by enormously weakening the incentive individuals have to build businesses. Businesses need clear and definitive reassurances right now.”
Capital gains tax is a tax levied on profits when selling assets, such as shares, a property that isn’t your main home and for selling a business. Currently, for high earners, the 20% CGT rate is significantly lower than a higher rate of income tax, which is 45%, which is an incentive for entrepreneurs to grow a business.
Additionally, entrepreneurs have already been hit with tax increases in recent years, firstly with the CGT threshold being cut from £12,300 to £3,000. On top of that, Entrepreneurs Relief (now called Business Asset Disposal Relief) was reduced in 2020 from from £10m to £1m. After that, they currently pay 20% CGT on further profits.
If the Government aligns CGT with income tax, the same entrepreneur could be paying 45% tax on the sale of their business.
We asked some of our members how proposed changes to CGT would affect the tech industry, specifically the startup industry:
Chris Gardner, Founder and CEO of Ninety Two Ventures, said:
“The most interesting consideration of any tax changes is whether they could materially affect the underlying culture of UK startups. These days it’s not enough for a founder to have a compelling mission.
“Those founders that really focus in on their innermost values - what is driving them personally - are the ones that truly stand out. And these founders tend to build the best businesses. Will that purpose-driven culture that we’ve seen emerge in the last decade become eroded?”
André Brown, CEO at Advanced Commerce, said:
“For many people, CGT is an entirely avoidable tax. Unlike income tax, CGT only becomes due when an entrepreneur sells their business. Entrepreneurs will just not be willing to pay 45% tax and will either not sell their business or just find ways around it, which means that it won’t raise the money they think it will.
“The proposed changes will have a chilling effect on future start-ups. Entrepreneurs thinking about starting new businesses will simply start them in a lower tax territory such as Dublin, Isle of Man, Gibraltar etc. The same is true for investors, who will not want to pay CGT at 45%. You can already see the effect these changes are having.
“The proposed change just sends the message that the UK is anti-business. If the Government wants to be taken seriously about supporting start-ups, then they should scrap the proposed changes to CGT as far as start-ups are concerned. They should also reinstate the Entrepreneur’s tax relief scheme introduced by Gordon Brown (10% up to £10m) which was subsequently reduced to £1m by Rishi Sunak.”
Rowan Morrow-McDade, Tax Director at Alexander & Co, commented
“The tax system should encourage individuals to take risks and invest, leading to long-term wealth creation. We already have a tax incentive that rewards individuals for investing in risky startups (Enterprise Investment Scheme).
“Starting a company is hugely risky and around 60% of startups fail. The UK would massively disincentivise individuals from starting businesses if they knew that they would be taxed at income tax rates (40%/45%) on an eventual exit, instead of 10%/20% currently.
“If CGT is raised to match income tax rates, the UK would have one of the highest rates in the world, with only Denmark and Australia similar (although the Australian rate is in practice half the headline rate). This is not an entrepreneur friendly environment and is not growth friendly.
“Raising Capital Gains Tax won’t necessarily increase tax revenue. Unlike Income Tax, taxpayers can broadly choose to crystallise gains or not. HMRC’s own research shows that increasing Capital Gains Tax by 10% would actually decrease the tax take by £400m in 25/26 and circa £1bn in 26/27.
“Entrepreneurs are the lifeblood of the UK economy; SMEs employ 61% of employees. Many founders are serial entrepreneurs, using cash from the exit of one SME to start the next. If 40% of the exit proceeds were taken away, they would have less incentive and capital to start the next.”
Robin Beattie, Director at Hays, said:
“The approaching Budget has created unease amongst founders, particularly with the suggested rise in Capital Gains Tax. Despite positive signals from the International Investment Summit, concerns persist that a CGT hike could lower exit values, making the UK less attractive for tech startups.
“At the moment, we haven’t seen a hiring surge post-election and there’s a real risk that founders will relocate businesses overseas. If this trend continues, it’s likely less and less entrepreneurs will see the UK as the ideal place to build their companies. This shift could significantly stifle the growth we need in our startup and scale-up ecosystem, potentially undermining the UK's position as a global tech hub."
