Entrepreneurs warn of exodus if capital gains tax rises

Stefano Vaccino provided a blunt assessment of the risks in starting a business. “As founders, we left our safe jobs to take risk, put our lives and our families’ lives at risk and put our savings on the line.”
When the former Goldman Sachs banker set up Yapily, a financial technology firm, in 2017, he paid his staff out of his own pocket for the first nine months and took no pay for two years. But, what he described as the “risk to his financial, physical and mental health”, paid off. The London-based business is now financially secure, employing 110 people and counting the likes of China’s Alipay as clients.
Other entrepreneurs are not so lucky, which is why Vaccino reckoned that those that survive need to be rewarded by being taxed at a lower level than income tax when they sell up. “About 90 per cent of company failures leave the founder with a huge loss. The 10 per cent that survive need to be rewarded for their sacrifices and for taking risk for creating new companies, creating jobs and growing the economy,” said the 42-year-old.
That reward has, for decades, been given in the form of capital gains tax — a lower tax rate levied on investments when they are sold. Now chancellor Rachel Reeves is looking to reduce the perk, and the prospect is causing mayhem in many parts of the business world.
Only a relatively small number of people pay it — about 350,000 a year — but many tax experts say charging them the full rate of income tax would risk driving many out of the country. If that happened, the £15 billion a year of CGT the Treasury currently gets would become far less.
As Tim Martin, chief executive of the stock-market listed pub chain JD Wetherspoon put it: “Not many people will care if people such as myself have to pay higher rates of CGT. The bigger issue, however, is to create a prosperous future for the UK. It’s vital to attract entrepreneurs and businesses from the rest of the world — and also to encourage home-grown equivalents.”
This weekend, the Treasury is a hive of activity as the chancellor is just days away from sending her preliminary budget plans to the Office for Budget Responsibility for it to adjudicate before she finalises what will go into the famous red box on October 30. Key decisions are being made, and lobby groups are making last-ditch efforts to get their voices heard.
Even before anybody knows exactly what the plan is for CGT, the uncertainty over it since Labour’s election win has sent ructions through the business world.
Under the current rules, anyone selling a business can expect to pay tax at 10 per cent if they are a lower-rate taxpayer, or 20 per cent if they are a higher-rate taxpayer. But, the expectation that CGT could be raised — possibly even as high as the 45 per cent top rate of income tax — has already encouraged some business owners to sell up more quickly than they had planned.
Emma Baylis, managing director at financial advisory firm Interpath, said: “We have seen an increase in anyone who was already contemplating selling looking to accelerate that where it’s commercially sensible to do that.”
Julia Cox at law firm Charles Russell Speechlys went further and said that in her 30 years as a personal tax and trust lawyer, for the first time she had started to see significant numbers of UK-based business owners consider moving overseas.
Some reckoned the mood was bleakest among owners of smaller businesses, but even some larger ones were looking to to sell out.
Among the many uncertainties is when the changes may come in. Traditionally, such moves begin at the start of the new tax year in April.
Kate Gribbon, who advises larger companies as head of financial sponsors at Investec, said: “There may well be an increase in business owners wanting to sell by April — albeit this may not be right for them commercially.”
One banker, Nick Fahy, who runs specialist banking group Cynergy, said companies in “growth mode” would not be concerned.
The current CGT regime also benefits people selling their shares, and City brokers report something of a rush of clients looking to ditch theirs before the new tax rules come in.
Britons sold £666 million of UK shares last month, according to the funds network Calastone, in what was the first monthly outflow from funds since last October. The slide is likely to have been at least partly triggered by the rumoured CGT increase.
Charles Hall, head of research at stock brokers Peel Hunt, described any increase in CGT as a “penalty on risk-taking”. “The less risk you take, the lower return you make, the less capital gains tax is an issue,” he said.
He reported “family money” selling off their shares in preparation. “Their comments are usually along the lines of ‘to spread my portfolio’ but what they actually mean is to ‘sell some equities before I get stung with a large capital gains tax bill’,” he said.
Others reported an increase in directors selling shares in stock market-listed companies. Cox said: “I’ve got a client who has built his wealth in a quoted company … but he feels he’s built it in a regime where he was expecting to pay 20 per cent tax. That’s why it matters to him if it goes up”.
About 3,000 individuals in the private equity industry pay CGT on the gains on their investments, known as carried interest, at a special rate of 28 per cent. In its manifesto, Labour had pledged to look at ways to ensure this tax rate could be aligned with the higher rate of income tax at 45 per cent.
During the election campaign, Reeves appeared to signal a compromise where those who put their own money into the funds — and were not just handed stakes — could continue to pay CGT at the lower rate. Michael Moore, chief executive of the industry lobby group, the BVCA, stressed: “This is a strategically important industry that has invested over £20 billion in UK businesses in the past year alone.”
The people who invest in start-ups and small businesses are also wary and thinking hard about whether to keep investing.
Joanna Jensen, an entrepreneur-turned angel investor, said she would not invest in more businesses if CGT rose. As chairman of the Enterprise Investment Scheme Association, she has close ties with the entrepreneur community. She said: “Every SME I know that is trying to raise money — and this is many, many people — are struggling. It is a major problem for them because the lifeblood of SMEs is private investors. If the government increases CGT, investors will not put their capital at risk. They will seek other, more plain vanilla investments or leave the country, as many are already doing.”
This will have a big impact on smaller companies, particularly those run by women, whose companies struggle to get funding from City venture capital funds, said Emma Sinclair, founder of tech company EnterpriseAlumni. She has just started a fundraiser of £10 million to £15 million, but said: “It is not a great environment to be trying to raise money. I have lots of angel investors and they are really concerned about a rise in CGT. No-one wants to invest until they see the impact of the budget.”
As wealthy as they might be, angel investors still plan their futures according to how much income they are expecting over the coming years from exiting their investments. “Now they’re expecting to get half of what they thought they’d get, thanks to the likely CGT changes. Of course, that’s going to make them think twice about investing more in high-risk, illiquid assets such as start-ups and scale-ups,” Sinclair said.
Chris Etherington, tax partner at consultancy firm RSM, warned that in many ways CGT, unlike income tax, was a “voluntary tax”. “For most people you decide as and when you sell an asset. You could just sit on that asset. If you’ve got a company that has lots of value in it that you want to sell, well if you put up CGT too high, you just don’t sell it.”
This is at the core of modelling that the Treasury will be scrutinising. Estimates by HM Revenue & Customs show that a one percentage point increase would raise just £100 million, while a 10 percentage point rise would reduce revenue by £2 billion by 2027-28.
This weekend, the Institute for Fiscal Studies is calling for an overhaul of the regime. It suggests aligning CGT and income tax rates, but crucially also factors in the cost of any investment that has been made by the person paying CGT.
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One entrepreneur, Di Gilpin, reckoned that if CGT rose, companies such as hers, which helps companies achieve net-zero goals, should be exempt. “We should be creative about CGT,” said Gilpin, whose Smart Green Shipping business provides sails for ships to reduce their reliance on their polluting engines.
Some wonder if Reeves might look at what used to be known as entrepreneur’s relief (now business asset disposal relief), under which tax is charged at 10 per cent on the first £1 million of gain. Some entrepreneurs such as Steve Rigby, who runs his family IT firm Rigby Group, reckon this perk could be removed as it is not much of an incentive for aspiring entrepreneurs. “I think most people go into business thinking they are going to make a lot more than £1 million,” Rigby said.
However, illustrating the conflicting factors Reeves will be weighing up, others such as Baylis at Interpath thought the £1 million level could be raised to help offset any changes to CGT. It used to be set at £10 million.
The Treasury stressed it could not comment on “speculation around tax changes outside of fiscal events” although one Treasury source said the priority on tax would be to raise revenue.
What is clear is that businesses are watching closely, including Vaccino at Yapily who warned that he would have to consider whether he stayed in London if the tax regime changed.