An influential left-wing think tank has argued that hiking capital gains tax would not reduce investment or impact entrepreneurship as the Chancellor considers raising the levy.
In a new report, the Institute for Public Policy Research (IPPR) urged the government to align capital gains tax with income tax, suggesting the measure could raise £14bn and actually encourage economic growth.
“CGT is not a primary driver of investment decisions,” it argued. “Entrepreneurs and investors alike focus much more on issues such as access to financing, market opportunities, and broader economic conditions.”
Rates of capital gains tax differ depending on the asset but are well below income tax rates, largely in an attempt to encourage innovation and risk-taking.
The lower rate is seen as one of the key ways that entrepreneurs make cash through their business, allowing them to pocket more of the profits from any potential sale of assets.
Reports suggest that Rachel Reeves is drawing up plans to lift capital gains tax as part of a £40bn package of tax rises and spending cuts, although its unlikely that the government will align it with income tax.
Many have warned that a tax hike risks crushing the UK’s entrepreneurial landscape. But IPPR said there was “scant evidence” that lower tax rates were “effective at encouraging entrepreneurial behaviour”.
It pointed to business asset disposal relief, a carve-out which offers a generous 10 per cent tax rate for entreprenueurs, as a particularly ineffective relief.
A study commissioned by HMRC in 2017 found that only 16 per cent of people who expected to qualify for the relief said it had influenced their business decisions.
Lower tax rates also create distortions in the labour market by encouraging workers to self-incorporate, it argued.
IPPR said that there were a range of potential policies which were more effective at supporting entrepreneurship and investment. These include generous support for R&D and financing schemes like the Entreprise Investment Scheme and Venture Capital Trusts.
“Rather than maintaining low CGT rates, the government should focus on expanding and refining these existing initiatives,” it said.
A number of entrepreneurs backed IPPR’s proposals. Graham Hobson, millionaire co-founder of Photobox said it was “simply a myth” that hiking capital gains would discourage entrepreneurship.
“Entrepreneurs are driven by passion, problem-solving, and creating value — not by low taxes,” he said.
Mark Campbell, millionaire co-founder of Higgidy pies, agreed that the tax rate was not a major factor for enterpreneurs.
“My experience is that what drives entrepreneurs and investment is not the tax rate but the opportunity to create impact and return,” he said.