Entrepreneurs warn that capital gains tax will increase and cause a mass exodus

Stefano Vaccino gave a blunt appraisal of the risks involved in starting a new business. “As founders we left our secure jobs to take risks, put our own lives and the lives of our families at risk, and put our savings on line.” In 2017, when the former Goldman Sachs Banker founded Yapily, an innovative financial technology company, he paid for his employees’ salaries out of his pocket for the initial nine months, and did not receive a salary for two years. What he called a “risk” to his physical, mental and financial health paid off. The London-based company is now financially stable, with 110 employees and clients such as China’s Alipay.

Vaccino believes that other entrepreneurs will not be so fortunate. Vaccino suggested that those who survive should be rewarded with a tax rate lower than the income tax at the time of sale. “About 90% of business failures result in a large loss for the founder. “The 10 percent that survive should be rewarded for the sacrifices they made and the risk they took to create new businesses, jobs and grow the economy,” said 42-year-old.

Since decades, this reward is given as capital gains tax, a reduced tax rate on investments sold. Rachel Reeves, the chancellor of England, wants to cut the benefit. This is causing chaos in the business world. Tax experts agree that a small number of people — around 350,000 per year — pay this tax, but they also say that charging them at the full rate would drive many of them out of the country. The Treasury would receive far less than the £15 billion in CGT it currently receives.

Tim Martin, the chief executive of JD Wetherspoon, a pub chain listed on the stock exchange said: “Not many will care if I have to pay higher CGT rates.” It is more important to ensure that the UK has a prosperous and successful future. It is important to attract entrepreneurs from around the world and to also encourage local businesses. Stefano Vaccino founded the successful financial technology company Yapily. He says that “90 per cent of failures result in a large loss for the founder.”

The Treasury is buzzing with activity this weekend. It is only a few days until the chancellor sends her preliminary budget plan to the Office for Budget Responsibility for its review before finalizing what will be in the red box on 30 October. The Treasury is a hive of activity this weekend as the chancellor is just days away from sending her preliminary budget plans to the Office for Budget Responsibility. It will then adjudicate before she finalises what will go into the famous red box on October 30. Since Labour’s victory in the election, uncertainty has risen throughout the business community.

According to the current rules anyone selling a company can expect a tax rate of 10 percent if you are a lower-rate payer, or 20 percent if you are a high-rate taxpayer. The expectation that CGT may be increased — perhaps even to the top rate of 45 percent income tax — has already encouraged many business owners who had been planning on selling up earlier than planned. Emma Baylis said that people who were already considering selling are now looking to sell faster, if it is commercially logical to do so.

Julia Cox, a lawyer at Charles Russell Speechlys, went on to say that she has seen a significant number of UK business owners considering moving abroad for the first. Even some of the larger companies were considering selling out. The timing of the change is one of the many unknowns. These changes are usually implemented at the beginning of the tax year, which is April. Kate Gribbon is the head of financial sponsors for Investec and advises large companies. She said: “There could be a rise in business owners who want to sell their businesses by April, even if it’s not right for them.

Nick Fahy of Cynergy specialist bank, a specialist banking group, says that companies in “growth mode”, will not be affected. Tim Martin, the chief executive of JD Wetherspoon pub chain, said: “It is vital to attract entrepreneurs from around the world, and to also encourage local equivalents.”

The CGT regime is also beneficial to people who are selling their shares. City brokers have reported a rush from clients wanting to sell their shares before the new rules take effect.

According to Calastone’s funds network, Britons sold £666m of UK shares in the last month. This was the first monthly outflow since October last year. This decline is at least partially due to the rumoured CGT hike.

Charles Hall, the head of research for stockbrokers Peel Hunt, referred to any increase in CGT a “penalty for risk-taking”. He said that the capital gains tax issue is less important the less you risk and the lower your return.

He said that “family money” was spent on selling their shares. He said that while they say “to spread my portfolio”, what they really mean is, “sell some equities to avoid a big capital gains tax bill”.

Other reported an increase of directors selling shares on stock exchange-listed companies. Cox stated: “I have a client that has built their wealth in a listed company… but they feel he built it under a regime in which he expected to pay 20% tax. It’s important to him that it increases.

Around 3,000 private equity professionals pay CGT at a special 28 percent rate on the gains they make on their investments. Labour pledged in its manifesto to find ways to align this tax rate with the 45 percent rate of income taxes.

Reeves seemed to indicate a compromise during the election campaign whereby those who invested their own money in the funds — rather than just being given stakes — would continue to pay CGT, but at a lower rate. Michael Moore, CEO of industry lobby group BVCA, said: “This industry is strategically important and has invested more than £20 billion into UK businesses over the last year.” Those who invest in small and new businesses are also cautious and unsure whether they should continue investing.

Joanna Jensen is an angel investor who was once an entrepreneur. She said that if CGT increased, she would stop investing in new businesses. She has strong ties to the entrepreneur community as she is the chairman of Enterprise Investment Scheme Association. She said, “Every SME that I know who is trying to raise funds — and there are many, many people — is struggling. Private investors are the lifeblood for SMEs. Investors will not risk their capital if the government increases CGT. “They will look for other investments that are more straightforward or leave the country as many have already done.”

Emma Sinclair is the founder of EnterpriseAlumni, a tech company. She said that this will have an impact on small companies, especially those run by female entrepreneurs, who struggle to obtain funding from City venture funds. She just launched a fundraising campaign of £10 to £15million, but stated: “It’s not the best environment in which to try to raise money.” Angel investors are very concerned about an increase in CGT. No one wants to invest before they see the effect of the budget.

Angel investors plan their futures based on how much they expect to earn from their investment over the next few years. Now they expect to receive half of what was expected, due to likely CGT changes. Sinclair stated that this will make investors think twice before investing in high-risk and illiquid assets, such as start ups and scale-ups. Rachel Reeves is currently working on the preliminary budget plan that she will present to the Office for Budget Responsibility

Chris Etherington of RSM’s tax department warned that CGT was in many ways a “voluntary” tax. “For the majority of people, you choose when and how to sell an asset. You could simply sit on the asset. You can’t sell a business that is worth a lot of money if the CGT is too high.

The Treasury will scrutinise the models based on this. HM Revenue & Customs estimates show that a 1 percentage point increase will raise only £100 million while a 10% percentage point increase will reduce revenue by £2 Billion by 2027-2028.

The Institute for Fiscal Studies has called for a major overhaul of the system this weekend. The Institute for Fiscal Studies suggests that CGT rates and income tax rates be aligned, but also takes into account the costs of any investments made by those who pay CGT.

Di Gilpin, an entrepreneur, said that companies like hers which help companies achieve net zero goals should be exempted from CGT. Gilpin’s Smart Green Shipping company, which provides sails to ships in order to reduce their dependence on polluting engines, said that we should be creative when it comes CGT.

Reeves could look at the entrepreneur’s tax relief, which is now known as business asset disposal relief. Taxes are charged at 10% on the first £1,000,000 of gains. Steve Rigby who runs the family IT company Rigby Group believes that this benefit could be eliminated as it does not provide much incentive to aspiring entrepreneurs. Rigby stated, “I believe most people enter business with the expectation of making a lot more money than £1,000,000.”

Baylis, from Interpath, thought that the £1,000,000 level could be increased to offset any CGT changes. It was previously set at £10million.

Treasury sources said that the Treasury would not comment on speculation about tax changes outside fiscal events, but they did say that it was important to increase revenue.

Businesses are paying close attention, and Vaccino from Yapily warned that he might have to reconsider whether he stayed or not in London if tax laws changed.