One of the great achievements of the early New Labour years was a tax regime that genuinely supported entrepreneurial activity. Despite some flaws, the Enterprise Investment Scheme offered an opportunity for entrepreneurs to launch and build a business and, then, enjoy a capital gains tax-free exit. The taper relief system encouraged entrepreneurs, business-builders and shareholders to hold onto business assets to enjoy a ten per cent CGT rate at the end.
All that good work started to unravel with the abolition of the taper relief system, taking CGT up to a (still reasonably generous) 18 per cent rate.
However, the announcement by the coalition government of its intention to raise capital gains tax for non-business assets to a flat 40 per cent, with “generous exemptions” for entrepreneurs, jeopardises the very entrepreneurial incentive that Britain needs to fight its way out of recession.
This proposal is wrong and will threaten Britain.
Talking to Entrepreneur Country, Betfair founder Ed Wray said: “In my opinion, startups in the UK should not attract capital gains tax of more than ten per cent. The only cost to the Treasury of a lower CGT rate is an opportunity cost. If new companies are successful, then the Treasury gains through VAT, PAYE and National Insurance not to mention corporate tax. What the UK government foregoes in capital gains by lowering the rate, it will make up in tax take elsewhere, in addition to all the benefits of creating global leading firms. Why would they want to take 40 per cent capital gains tax which disincentivises a management/early-stage team in a new business?”
We still don’t know the full details of those “generous” exemptions but, even if they are munificence itself, this major capital gains tax hike still threatens to undermine enterprise across the UK.
Take property investment. Stephen Alambritis from the Federation of Small Businesses has called for property investments to be exempted from the CGT rise. Quite right, too. For the millions of thrifty, enterprising people across the UK who do not enjoy marvellous final-salary schemes, property investment has been one way to secure their futures. These enterprising individuals who have bought second properties to fund their retirement or to plug the gaps where council/social housing fails – they will be hit by a 40 per cent CGT rate.
Investors in the stockmarket, too, may not seem like entrepreneurs but they have still applied enterprise to their long-term life plans, only to see them threatened by this move.
The country needs to raise funds to plug its deficit but, even more crucially, it must start to grow again, to encourage enterprise and grow businesses that will create prosperity and jobs in the future. The proposals to raise CGT threaten this, for a very modest Treasury return. Leave the CGT regime alone.