CGT hike: Would it impact on investment?

Investors and entrepreneurs have warned Britain will lose fast-growing startups if the government raises capital gains tax (CGT) in its October budget.

CGT is tax on any profits or gains you make when you dispose of an asset. Assets not only apply to the sale or exit of business but can also apply to the sale of items such as offices and trademarks. Even the goodwill built up by your company could ultimately be taxable.

According to a report by business news provider Bloomberg, Gibraltar, Dubai, Bermuda and the US may appear more attractive to startup chiefs if there is a CGT hike.

There are also fears that any hike in the rate will deter investment, not only in large businesses, but in SMEs.

Speculation is growing that capital gains will be targeted by the Treasury as the new Labour administration looks to plug what it describes as a £22bn black hole in the government’s finances.

Chancellor Rachel Reeves has declined to rule out a rise after warning that difficult decisions will have to be taken – a stance also taken by prime minister Sir Keir Starmer in recent speeches.

In an interview with Bloomberg Television, Ms Reeves said that the UK will strike the “right balance” on tax at the Budget on October 30.

The chancellor said: “Of course you need to bring in the revenue to fund vital public services, but we’ve also got to grow the economy.

“I won’t do anything that makes it harder to achieve that economic growth and prosperity.”

According to some reports, she may be planning to increase the rate of CGT in line with income tax.

Analysis by wealth management firm Quilter has warned that if that happens it would mean landlords could face paying an average of £11,000 extra when disposing of property.

Currently basic rate taxpayers are charged 18 per cent on gains and higher rate taxpayers are charged 24 per cent. Raising rates in line with income tax would increase these figures to 20 per cent and 40 per cent respectively.

When he was chancellor, former Tory prime minister Rishi Sunak was reported to have shelved a proposal to hike CGT to help him plug the post-Covid hole in his finances.

The Office of Tax Simplification (OTS) had recommended changes to CGT to bring it to the same levels as income tax, after being asked by the chancellor to carry out a review of the system.

The OTS had also proposed lowering the annual allowance on the tax – a levy on any profit made when selling an asset.

However, according to reports, the then chancellor had pointed to the “burden” such a proposal would place on tax collectors.

A minister at the Treasury was said to have told the OTS at the time: “These reforms would involve a number of wider policy trade-offs and so careful thought must be given to the impact that they would have on taxpayers, as well as any additional administrative burden on HMRC.”

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