Raising capital gains tax to between 33 and 39 per cent in an attempt to shore up the government finances “should be resisted” and may “end up lowering the tax take”, a group of 500 British entrepreneurs has warned.
In an open letter to the Chancellor, which is signed by the founders of Signal AI, Yonder and Zopa, the entrepreneurs warned against any hikes to capital gains tax (CGT) and business asset disposal relief (BADR) at the upcoming Budget, which have both been the subject of frenzied media speculation in recent weeks.
“It has been reported that your officials have modelled the impact of increasing CGT as high as 33 per cent to 39 per cent,” the group of founders said. “Higher CGT or any restrictions on BADR would make this relief less competitive at a time when the rest of the world is making their reliefs more competitive.
“It would mean the UK has the second-highest CGT rate in Europe, and jeopardise the success of our country’s startup ecosystem by enormously weakening the incentive individuals have to build businesses. Businesses need clear and definitive reassurances right now.”
The Starmer administration has said the upcoming Budget will consist of “difficult decisions”, after it claimed to have found a fiscal blackhole of £22bn at a spending audit published in July.
In the run-up to the general election, Labour promised there would be “no return to austerity” and ruled out any tax rises on “working people” leaving capital gains tax as a likely potential revenue raiser.
But the group of entrepreneurs, which also comprised the founders behind Oaknorth Bank, Lantum and CMR Surgical, warned that any rise might actually lose the exchequer revenue due to the stifling effect it will have on entrepreneurialism and investment.
“Policymakers should also understand that entrepreneurship is an engine for further economic growth,” the letter said. “By discouraging entrepreneurs from starting and growing their businesses, HM Treasury could well end up lowering the tax take overall.
“Indeed, this is what its own previous modelling suggests. Leading economists are also much more likely to agree than disagree that taxing capital income at a permanently lower rate than labour income would result in higher average long-term prosperity.”
The founders also said that a rise of that much would leave the UK with the third highest tax on capital gains in Europe, and would thus perturb founders from setting up businesses in the UK, and staff from wanting to work at them.
They added that the move would likely be a false economy as any revenue the move might raise in the short term would “likely be more than offset by the damage it does to long-run productivity by stifling the growth of future start-ups”.
Rachel Reeves will deliver her first Budget on 30 October.
An HM Treasury spokesman said: “We’re supporting businesses through pledges to make the business rates system fairer, to cap corporation tax at 25% and to publish a business tax roadmap so that future investments can be planned with confidence.”