Why a hike in capital gains tax could see UK founders fly the nest

26 February 2021 | Thoughts and Opinions

Why a hike in capital gains tax could see UK founders fly the nest

Government plans to hike capital gains tax are ‘ludicrous’ and will lead to a surge in founders quitting Britain and setting up abroad, our founder and CEO Toby Harper warns.

Recent reports indicate that entrepreneurs across the country fear Rishi Sunak is about to change the rules on capital gains tax (CGT) in his budget on 3 March.

One of the measures reportedly under consideration is to equalise capital gains and income tax rates, which could raise up to £14bn a year. It would mean founders facing higher tax bills when selling a company or shares.

At Harper James our team of experts provide legal support to ambitious businesses looking to grow from start-up to scale-up and advise many firms looking to sell or invest.

Commenting on the proposed rise in CGT, Toby warned any changes risked stifling deals, driving entrepreneurs abroad and harming the start-up ecosystem: ‘A radical increase in CGT will probably mean more tax revenue in the short term. But it could just as likely stifle long-term innovation and economic growth and prosperity. It is ludicrous to think that capital growth in small high-risk companies is an inevitable consequence of wider economic activity and therefore CGT should be charged at rates equivalent to income tax. 

‘For most founders of small businesses, they are risking everything moving away from the comfort and security of a salary. The vast majority fail but for the small number that don’t, creating wealth, employment and opportunities for many should be taxed at an appropriate rate to encourage and reward that activity.’

Toby also warned the pandemic had changed the landscape for the way founders now work. This, he says, makes it easier than ever for UK-based entrepreneurs to simply up sticks and set up abroad: ‘More than anything the government needs to realise, especially with the accelerating factor of Covid-19, that remote working is available to everyone. There are plenty of stable, developed, culturally rich countries in Europe that will offer homes to founders looking to avoid any form of CGT altogether. These days, a modern founder could run their business from anywhere in the world, and many will if CGT is increased significantly.’

Founders currently pay 10 per cent to 20 per cent when they sell their business. The rate is 28 per cent on profits of more than £1m from residential property. The top rate of income tax is 45 per cent in England, Wales and Northern Ireland. If CGT leapt to that, a £100m profit could net an owner about £55m, compared with £80m now.

Rishi Sunak has already significantly scaled back relief for entrepreneurs. Last year, he cut the lifetime cap on the 10 per cent rate from £10m to £1m. The chancellor is planning to launch a large-scale tax consultation next month.

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