Why a proposed UK capital gains tax rise could put off entrepreneurs

The UK’s Labour Party has recently mooted that it could raise capital gains tax if elected in 2024, sparking some concern among UK entrepreneurs. In a business context, capital gains tax could lead founders to fold their ventures and sell up or move their businesses elsewhere before the potential tax raid materialises.

What is capital gains tax and why might Labour want to increase it?

For the uninitiated, capital gains tax refers to the tax placed on profits earned from the sale of an asset, which could be any investment – stocks, real estate, precious minerals and many others. It is calculated based on the difference between the asset’s original price and its sale price, with allowable deductions and other expenses applied.

The Labour Party appears keen on increasing capital gains tax, which raises the tax on the sale of business assets. This means entrepreneurs will make less profit from the sale and may need to consider using other sources of capital. A projected result is that entrepreneurs are less likely to move their businesses as they cannot feasibly put their assets on sale and take risks for the prospect of profit.

The intention is to ensure fairness in taxation, especially in light of Prime Minister Rishi Sunak’s tax returns. Sunak was known to have paid 22pc in capital gains tax despite earning £5m over a three-year period – a disparity that Labour wants to see corrected.

Why a higher capital gains tax could be bad news for the economy

While an increase in capital gains tax might sound like a decent idea on paper, especially for the national economy, here’s why entrepreneurs won’t welcome it with open arms:

• It stifles innovation.

The tax liability from the sale of assets can significantly reduce the profits entrepreneurs can get in the process. With reduced capital gained from the sale, entrepreneurs are less likely to take risks, potentially stifling innovation that will not only drive growth to one’s business but can also potentially help society as a whole.

• It may discourage entrepreneurship.

Many entrepreneurs obtain capital for new ventures from the sale of assets from their existing businesses. As they will gain less money from the sale, it may be more difficult for them to find financing to fund new businesses, including those that may support their existing ventures.

• It may slow down a business’ growth.

As the high tax burden discourages entrepreneurs from taking risks to innovate, businesses may stagnate. The firm may still grow, but as the sale of assets becomes less feasible to procure capital for further expansion, rapid growth is unlikely.

• It can make the UK a less attractive place for new businesses.

High taxes can discourage entrepreneurs from starting new businesses in the country. This lowers the return on investment, prompting entrepreneurs to fund start-ups somewhere else.