The Guardian recently reported that the UK government is considering changes to Capital Gains Tax (CGT), including a potential hike to as much as 39%. While this might seem like a logical step to plug a £25 billion hole in public finances, applying a flat CGT rate across all asset classes could have devastating consequences for the UK’s entrepreneurial ecosystem and long-term competitiveness.
CGT is the tax paid on the profit made from selling assets like property, stocks, or a business. Entrepreneurs and investors, who help businesses grow, often pay CGT when they sell their successful companies. The amount of tax they pay influences whether they choose to invest more or sell, affecting the entire business environment.
In the UK, CGT rates have typically been lower than income tax, recognizing the risks that entrepreneurs take when starting a business. But there are now discussions about increasing CGT rates, making them the same as income tax rates. While this might seem fair, it could have harmful side effects.
Capital Gains Tax is levied on the profit made from selling assets, such as shares or property. Entrepreneurs often rely on selling their businesses or assets to fuel new ventures or reward themselves for years of risk-taking. A higher CGT means less profit for founders, discouraging them from starting new businesses or reinvesting in the economy.
For example, the UK tech sector, a critical driver of the country's global reputation for innovation, is particularly vulnerable. A recent survey revealed that 66 fintech leaders expressed concerns that increasing CGT could drive talent and investments away from the UK. Some entrepreneurs are even considering selling their businesses before the new tax rates take effect, fearful of being hit with significantly higher taxes.
Business owners take big risks to build their companies, and the chance for big rewards motivates them. Higher CGT reduces those rewards, which can discourage people from starting businesses. This is especially true in industries like tech, where investors put in money with the hope of making big returns to cover losses from failed projects.
Less Investment: When investors face higher taxes on their profits, they may decide to invest in safer options or move their money to countries with lower taxes. This would hurt the UK’s growing industries, such as technology and green energy, which need strong early-stage funding.
Slower Business Growth: Entrepreneurs aim to sell their businesses and earn significant rewards. Higher CGT makes selling less attractive, reducing opportunities for new entrepreneurs to enter the market. If existing businesses don’t change hands, they could become stagnant, missing chances for growth.
Losing Top Talent: Higher CGT could drive successful entrepreneurs to other countries with lower tax rates. This "brain drain" would mean losing innovators who create jobs and grow the economy.
The UK is known for its start-up ecosystem, especially in the tech and fintech sectors. However, if CGT rates rise, early-stage companies may find it harder to attract investments. Investors will demand higher returns to offset the higher tax burden, which could stifle innovation and job creation. According to a study by LSE academics, this could lead to a potential £500 million loss in foregone tax revenue annually.
Entrepreneurs like Simon Gleeson from Monzo have pointed out that CGT hikes could act as a “punishment” for long-term business owners. This fear may lead many UK-based innovators to relocate to more tax-friendly countries, further weakening the nation’s global standing.
The UK is not alone in dealing with CGT, and looking at other countries can provide valuable lessons. The United States, for example, keeps lower tax rates on long-term capital gains to encourage investment in businesses and startups. This has helped the U.S. foster a strong entrepreneurial environment and attract investors from all over the world.
On the other hand, countries like France, which have higher CGT, struggle to maintain the same level of business activity. Entrepreneurs in high-tax countries are often less willing to take risks, which can make it harder to get funding and grow new companies.
If the UK wants to stay a leader in innovation, it needs to think carefully before raising CGT. Instead of increasing taxes on gains, the government should find other ways to raise money without discouraging entrepreneurs and investors who help grow the economy.
One idea could be to use a tiered system where lower rates apply to long-term investments. This would encourage people to hold onto their investments longer and reward patience. The government could also offer tax breaks to key industries like technology and green energy to keep innovation growing.
Raising CGT might seem fair, but it could have unintended consequences for the UK economy. Innovation and entrepreneurship drive growth, and CGT plays an important role in supporting risk-takers. Surveys show that higher CGT could lead to less investment, slower business growth, and a talent exodus.
If the UK wants to continue being a hub for innovation, it must create an environment where entrepreneurs feel encouraged, not punished, for taking risks. Policymakers need to think carefully about how changes to CGT could impact the future of innovation and entrepreneurship in the country.