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As Labour’s first budget draws ever closer, campaigners and think-tanks are ramping up calls for how they think the government should approach possible changes to capital gains tax (CGT), with research on what effect changes might have on entrepreneurship.
UK CGT is currently set at 20% on most assets. The Guardian newspaper reported last week that chancellor Rachel Reeves is considering raising CGT as high as 39% in the budget.
Earlier this week, The Entrepreneurs Network (TEN) urged business owners to sign an open letter calling for consideration of their views on potential changes to business asset disposal relief (BADR) and CGT.
“Higher CGT or any restrictions on BADR would make this relief less competitive at a time when the rest of the world is making their reliefs more competitive,” the open letter said. “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.”
Read more: Why are millionaires fleeing the UK and could an ‘exit tax’ stop them?
“Any revenue [a CGT rise] might raise in the short term would be more than offset by the damage it does to long-run productivity by stifling the growth of future startups,” added Philip Salter, the founder of TEN, in a LinkedIn post.
Is CGT really driving people away?
While businesses fret over potential changes, new research has suggested that increasing CGT will not lead to lower investment, slower growth or reduced entrepreneurship.
An analysis from the Institute for Public Policy Research (IPPR) found “CGT is not a primary driver of investment decisions. Entrepreneurs and investors alike focus much more on issues such as access to financing, market opportunities and broader economic conditions.”
Capital gains mainly becomes relevant at the point of exit, the research adds, when a business is sold or an asset is liquidated, long after the crucial early stages of business growth have taken place. Only a minority of entrepreneurs are swayed by CGT when they think about starting out, most are focused on successfully running their business.
Read more: UK business owners fast-track exit plans amid fears of capital gains tax raid
“The idea that raising capital gains tax would discourage entrepreneurship is simply a myth,” said Graham Hobson, millionaire co-founder of Photobox. “Entrepreneurs are driven by passion, problem-solving and creating value — not by low taxes.”
“A balanced tax policy that supports both innovation and fairness can only strengthen the UK economy by ensuring that everyone, including successful investors, contribute their share.”
The research comes with a call for the government to equalise CGT with income tax — a move which would raise around £14bn a year, according to IPPR calculations.
CGT is only paid by around 0.65% of the adult population (350,000 people), however most CGT revenue only comes from the 0.02% of the population who make gains of over £1m.
This point has been hammered home by other tax researchers, too. Last week an analysis on the potential effects of an “exit tax” by LSE researchers found new CGT rules for entrepreneurs who choose to re-domicile businesses could raise significant revenue without affecting most emigrants.
Among UK nationals, the business shareholdings of leavers are worth more than £5bn, according to a report by LSE academics. This means the UK could raise an estimated £500m per year in foregone CGT with new laws.
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