As the UK prepares for the Autumn Budget on October 30, 2024, many entrepreneurs, stakeholders and investors are expressing growing concerns over potential changes to existing tax rates, in particular possible changes to capital gains tax (CGT) rates. Investors are likely to also be affected – by James Klein
With the new Labour Government facing a reported £22 billion shortfall in public finances, CGT (amongst other taxes) has emerged as a likely target for revenue generation.
As the Budget draws closer, it's important to assess what impact any proposed changes might have.
Likely proposed changes
- Increased CGT Rates: Reports suggest that Chancellor Rachel Reeves is considering raising CGT rates which will affect, for example, the tax payable on the sale of shares and other assets. The current CGT rate of 20% on profits from the sale of shares could see a marked increase of several percentage points.
- Elimination of Reliefs: The proposed changes may also include the removal of various tax reliefs currently available, further increasing the tax burden.
- Alignment with Income Tax Rates: There is more than a little speculation that CGT rates could be aligned with income tax rates, which would represent a significant tax increase.
- Private equity: As the Government looks to balance the raising of additional revenues at the same time as establishing its blueprint for growth, potential reforms are on the cards to the taxation of carried interest on the profits that general partners of private equity funds earn as compensation. This could mean higher taxes on the profits that VC and PE fund managers receive which would impact their overall returns.
- Further incentives for new investment: New incentives could be put forward to encourage and foster new investment in startups and small businesses. The Government may increase the tax relief available under the Seed Enterprise Investment Scheme making it more attractive to investors to fund early-stage businesses and may also expand or enhance the Enterprise Investment Schemes (EIS) for larger funding rounds. The Government could also introduce some form of CGT relief for current investments in start-ups/small businesses to reduce the tax burden on existing investors exiting their investments.
Possible impact on stakeholders
- Higher Tax Burden: An increase in CGT rates would result in a higher tax burden for stakeholders when they sell their shares or assets, reducing their net returns.
- Investment Decisions: Higher taxes could deter owners of shares from selling their investments, potentially leading to reduced liquidity in the market.
- Corporate Transactions: For those looking to "take cash off the table" through corporate transactions, higher CGT could make this less attractive, affecting strategic business decisions.
- VC and Private Equity firms: if carried interest taxation is increased, PE and VC fund managers will see lower returns.
Potential Outcomes
- Reduced Investment strategy: investors might become more cautious with their investments, leading to reduced capital flow into businesses.
- Strategic Shifts: Companies may need to rethink their strategies for growth and expansion, considering the potential tax implications.
- Deal vacuum: As in previous years, and as we are currently experiencing, an increase in corporate transactional activity may occur as shareholders look to realise investments and take cash off the table before any increases to CGT might take effect.
- New tax incentives: new incentives could be proposed for small businesses (as outlined above) as well as measures to improve access to capital for small businesses.
Innovation and technology
New incentives could be put forward to encourage new investment in start-up and scale up businesses. Key areas of focus include increased public funding for research and development (R&D) as the Government aims to position the UK as a global innovation leader by funnelling more grants and tax incentives into companies driving R&D, particularly in key sub-sectors of technology like life sciences, digital health and green energy.
It is also worth considering infrastructure and skills, where proposals for improved broadband and digital infrastructure and programs to enhance skills and training in certain areas of technology and innovation sectors have been mooted, whilst the ongoing focus and development of AI and fintech continues to be at the forefront of thinking.
As the budget approaches, founders, shareholders and investors are closely monitoring developments. The decisions made in this budget are likely to have significant implications for the investment landscape in the UK.
Originally published by DIY Investor
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
