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CGT rise: what it means for entrepreneurs

Capital gains tax (CGT) is probably the single most important tax issue that entrepreneurs have been up in arms about. The new coalition government has already confirmed that it will more than double CGT from its current rate of 18 per cent for non-business assets, such as property and shares, but what does this mean for entrepreneurs?

The truth is, no one knows yet.

Under the current rules, entrepreneurs must pay a CGT rate of ten per cent on the first £2m of their proceeds, followed by a flat rate of 18 per cent to all other capital gains.

In the coalition document between the Tories and the Lib Dems, which spelled out the CGT increases on non-business assets, both parties agreed to give “generous exemptions” to entrepreneurial business activities.

But that still doesn’t tell us much. In fact, it leaves us in what Dragon Deborah Meaden termed “suspended animation”.

“Yes, somebody has to pay and I’m in a stronger position than most. I have no problem with that,” Meaden tells the Telegraph. “But this government needs to be very careful that it doesn’t stop the engine of the economy – to hamper that is crazy, it’s ludicrous.”

“To get this wrong would be to fail at the first fence,” adds Theo Paphitis. “We need to incentivise people to invest long term in the UK, create jobs.”

Jos White, co-founder of Notion Capital, agrees, adding that the government needs to clarify what the situation is as soon as possible.

“What exactly meant by ‘non-business’ assets” The coalition needs to define what it means by this woolly phrase as a matter of urgency. Until we know exactly what the ‘generous exemptions’ to business profits are, small and medium-sized businesses and entrepreneurs are right to be very concerned that the new government intends to tax them unfairly.”

So what do the experts think?

Tony Cohen, head of entrepreneurial business at business advisory firm Deloitte, tells Real Business that although the situation is clear for now, we can expect details in the new government’s ‘mini-Budget’, which he expects will be held on June 23. (Update: the Chancellor has announced that the emergency budget will take place on June 22 – so not too far off Cohen’s prediction!)

“Details are still currently limited, but we expect that the rate of tax on non-business assets will be 20 per cent for basic rate taxpayers and 40 per cent for higher and additional rate taxpayers, although this hasn’t been confirmed by the Treasury.

“There is also speculation that the capital gains except allowance will be reduced, which will bring many more people into the tax net. The ‘generous exemptions’ may be enhancements to entrepreneurs’ relief, but this too is unclear.”

Although Andrew Renton, a partner at Bowling & Co, a law firm specialising in advising owner-managed businesses, believes CGT will increase, this won’t be at the same level as income tax.

“That would be grossly unfair on entrepreneurs. Entrepreneurs are the future of this country, and the Conservatives understand this. While they do talk about ‘generous exemptions’ for entrepreneurial activities, I suspect that this will be in various disguises for different businesses.”

For example, Renton explains, although Britain was the tenth biggest import/export country in 2009, this still resulted in a trade deficit. “The new regime will be generous to some entrepreneurial activity, but I think they’ll favour those that export out of the country as this will eventually help to balance the books.”

Meanwhile, Deloitte’s Cohen predicts we could end up with three rates of CGT:

  • a ten per cent entrepreneurs’ relief (up to £2m)
  • a lower rate for business assets and basic rate income taxpayers (20 per cent)
  • and a higher rate (40 per cent)

“But it’s not clear whether the increase in the rate will occur in the next tax year or if there will be a mid-year change. Although a mid-year change has never been implemented before, there is nothing to suggest that this is impossible.”

So should you try selling your business now, to avoid any increase in CGT?

Bowling & Co’s Renton says he hasn’t seen much activity yet. “Entrepreneurs are unlikely to sell businesses in the current climate, but there is evidence of entrepreneurs being active in purchasing assets or businesses to take advantage of the depressed prices.”

We’re eager to hear your reactions. How much is too much for you” Leave your reactions below.


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