As Labour’s first budget approaches, there is growing debate about potential changes to capital gains tax (CGT) in the UK. Campaigners and think tanks are urging the government to consider how these changes could impact entrepreneurship.
Current CGT Rates and Proposed Increases
Currently, the UK imposes a CGT of 20% on most assets. Recent reports from The Guardian indicate that Chancellor Rachel Reeves is contemplating increasing this rate to as high as 39% in the upcoming budget.
In response, The Entrepreneurs Network (TEN) has called on business owners to sign an open letter expressing their concerns. The letter argues that higher CGT or restrictions on business asset disposal relief (BADR) would make the UK less competitive. “It would mean the UK has the second-highest CGT rate in Europe and jeopardize the success of our country’s startup ecosystem,” it states.
Philip Salter, founder of TEN, commented on LinkedIn, stating that any short-term revenue gained from raising CGT would be outweighed by long-term productivity losses. He believes it could stifle the growth of future startups.
Research on CGT and Investment
While many businesses are worried about possible changes, new research suggests that increasing CGT may not deter investment or entrepreneurship. An analysis by the Institute for Public Policy Research (IPPR) found that CGT is not a major factor influencing investment decisions. Instead, entrepreneurs and investors prioritize access to financing, market opportunities, and broader economic conditions.
According to the research, CGT primarily comes into play when a business is sold or an asset is liquidated, which occurs long after the early growth phases. Most entrepreneurs focus on running their businesses rather than being influenced by CGT.
Graham Hobson, co-founder of Photobox, stated, “The idea that raising capital gains tax would discourage entrepreneurship is simply a myth. Entrepreneurs are driven by passion, problem-solving, and creating value — not by low taxes.”
Calls for Tax Policy Changes
The IPPR research also suggests equalizing CGT with income tax, which could generate around £14 billion a year. Currently, only about 0.65% of the adult population pays CGT, with most revenue coming from just 0.02% of individuals who make gains exceeding £1 million.
Other tax researchers have echoed these findings. Last week, a report from LSE researchers explored the effects of an “exit tax.” They found that new CGT rules for entrepreneurs relocating their businesses could yield significant revenue without impacting most emigrants. According to LSE academics, the business holdings of UK nationals who leave are worth over £5 billion, potentially generating an estimated £500 million per year in foregone CGT with new laws.
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