UK Labour Hikes Capital Gains Tax by Less Than Feared, Offering Relief to Tech Entrepreneurs
The UK’s Labour government announced plans to raise the rate of capital gains tax on share sales, providing some relief for technology entrepreneurs who feared a more intense tax raid on the wealthy. Finance Minister Rachel Reeves increased the lower capital gains tax rate to 18% from 10%, while the higher rate will climb to 24% from 20%. The tax hikes are expected to bring in £2.5 billion.
Reeves maintained the £1 million lifetime limit on capital gains from the sale of all or part of a company under business asset disposal relief (BADR), quashing fears that the tax relief scheme for entrepreneurs would be scrapped. However, she added that the rate of CGT applied to entrepreneurs selling all or part of their business under BADR will be increased to 14% in 2025 and 18% a year later.
The changes form only a small part of sweeping fiscal changes the recently-elected Labour government laid out in its debut budget in an attempt to close a multibillion-pound funding gap in public finances.
Brain Drain Feared
Reeves’ announcement comes after speculation over capital gains tax changes caused a backlash from tech founders and investors. On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk Reeves’ tax plans could result in a tech “brain drain.”
A survey conducted by Startup Coalition with private company database Beauhurst showed that 89% of those polled would consider moving themselves or their business abroad, with 72% having already explored this possibility. The survey data also showed that 94% of founders would consider starting a future company outside of the UK if the government were to raise the CGT rate.
Startup Coalition’s executive director Dom Hallas said that while the survey findings were grim, he doesn’t expect founders will “flee if things get hard” as they “aren’t naive about the role of taxes in society.”
Focus on Growth-Oriented Policy
Tech entrepreneurs and investors are urging the government to return to its focus on fostering growth and innovation in the UK, messages which were key to Labour’s election manifesto prior to the landslide win that saw Keir Starmer become prime minister.
“We’re already seeing early-stage firms in the UK struggle securing pre-seed and seed funding, with VCs here having a lower risk appetite. A higher CGT will act as a further deterrent,” said Phil Kwok, co-founder of EasyA, an e-learning startup.
Hannah Seal, a partner at Index Ventures, told CNBC that the government should “pursue reforms that make it easier for startups to attract talent through employee ownership and ensure all regulators prioritise innovation and growth.”
Ultimately, “business decisions are influenced on more than just fiscal policy,” said Edgar Randall, managing director of UK and Ireland at data and analytics firm Dun & Bradstreet, adding that ‘entrepreneurs look at the ecosystems (as) a whole.”
