On Monday, British technology lobby group Startup Alliance warned in a blog post that Reeves’ tax plan could lead to a “brain drain” in technology. (Photo by Olly Scarfe/Getty Images)
Olly Scarfe | Getty Images
LONDON — Britain’s Labor government announced plans on Wednesday to increase the rate of capital gains tax on share sales, news that brought relief to tech entrepreneurs who feared a tougher tax hit on the rich.
Treasurer Rachel Reeves on Wednesday raised capital gains tax (CGT) – the tax levied on investors’ profits from selling their investments – as part of her far-reaching budget announcement. Reeves said the lower capital gains tax rate would increase from 10% to 18%, while the higher capital gains tax rate would increase from 20% to 24%. The tax increase is expected to bring in £2.5bn.
“We need to drive growth, boost entrepreneurship and support wealth creation, while raising the revenue needed to fund our public services and restore public finances,” Reeves said, adding that even with higher interest rates the UK “still has Capital gains tax rates are among the lowest among European G7 economies.
Reeves has maintained the lifetime cap on capital gains from the sale of all or part of a company’s assets under Business Asset Disposal Relief (BADR) at £1 million, allaying fears among entrepreneurs that the Entrepreneur Tax Relief scheme will be scrapped.
However, she added that the capital gains tax rate applicable to entrepreneurs who sell all or part of their business under BADR will increase to 14% in 2025 and to 18% a year later. “This is still a huge gap compared to the higher capital gains tax rates,” she stressed.
Reeves also announced plans to increase employers’ National Insurance (NI) rates – a form of income tax – which would be less popular with businesses. For workers earning more than £9,100 a year, the current rate is 13.8%. The tax rate will rise to 15% on annual salaries over £5,000.
The changes are just a small part of sweeping fiscal reforms proposed by the recently elected Labor government in its first budget on Wednesday, which aim to close a multi-billion pound funding gap in the public finances.
Worry about “brain drain”
Reeves’ announcement comes after speculation about capital gains tax reform prompted a backlash from tech founders and investors. Even before Reeves made the announcement, expectations that capital gains taxes would increase were causing anxiety among tech founders across the country.
On Monday, British technology lobby group Startup Alliance Warning in blog post Reeves’ tax plan threatens to cause a tech “brain drain.”
A survey of 713 founders and investors conducted by the Startup Coalition and private company database Beauhurst found that 89% of respondents would consider moving themselves or their businesses abroad, with 72% having already explored it. possibility.
Survey data also shows that if the government increases the capital gains tax rate, 94% of founders will consider setting up future companies outside the UK.
Dom Hallas, executive director of the Entrepreneurship Alliance, said that while the findings were grim, he did not expect founders to “flee when things get tough” because they “have no understanding of the role of taxes in society.” Not naive”.
“Any increase in capital gains tax (CGT) and net national income (NI), a gradual increase in commercial depositary receipts (BADR) and an increase in investor taxes,” Halas told CNBC via text message after Reeves delivered his budget speech. Budgeting is never easy, and now it’s going to be difficult for founders to see their business’s taxes go up.
However, he added: “We applaud the government for listening and ensuring that entrepreneurs’ worst fears are not realized and that some balance is struck, including maintaining all important investment in research and development.”
Barney Hussey-Yeo, chief executive and co-founder of fintech app Cleo, told CNBC last week that he was considering moving to the United States due to Labor’s tax plans.
“There are a lot of founders who have left, or are considering leaving, who are excited to go to Silicon Valley,” Hussey-Yeo told CNBC on the sidelines of venture capital firm Accel’s EMEA Fintech Summit in London last week.
Hussey-Young did not respond to a request for comment on Wednesday about whether he still plans to move abroad. However, he told CNBC that the budget announcement was “better than I thought,” adding that “it looks like they listened” to entrepreneurs.
Focus on growth-oriented policies
Tech entrepreneurs and investors have urged the government to refocus on promoting growth and innovation in the UK, messages that were key to Labour’s election manifesto ahead of Keir Starmer’s landslide election as prime minister.
Phil Kwok, co-founder of EasyA, said: “We are already seeing early-stage companies in the UK struggling to access pre-seed and seed funding, while venture capital firms here have a lower risk appetite. Higher capital gains tax will act as a further deterrent. .
He added: “All things considered, we could see investors and the next generation of founders looking to other markets such as the US.”
Hannah Seal, a partner at Index Ventures, told CNBC that the government should “implement reforms to make it easier for startups to attract talent through employee stock ownership and ensure that all regulators prioritize innovation and growth.”
She added: “Such pro-startup policies are vital to demonstrate the UK’s commitment to remaining a global center of innovation competitiveness, particularly in light of today’s announcement.”
Edgar Randall, managing director for the UK and Ireland at data and analytics firm Dun & Bradstreet, told CNBC that to remain competitive, governments should “weigh the cumulative effect of policies that impact growth.”
These include policies affecting energy costs, employer national insurance contributions and the tax structure of capital gains and dividends.
Ultimately, “business decisions are influenced by more than just fiscal policy,” Randall added. “Entrepreneurs look at the ecosystem as a whole.”
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