Capital Gains Tax rears its ugly head again

Author: Simon Heath, Managing Partner, Heligan Corporate Finance

In the 20 years I have been advising companies on M&A transactions, the spectre of Capital Gains Tax (“CGT”) increase has been hovering over the industry multiple times but now it feels closer than ever.  With Labour winning the General Election with a significant majority, and with a manifesto that includes raising the CGT threshold, it is more than likely that this will now happen.  CGT has been under threat and other CGT reliefs have all but been eliminated as Business Asset Taper Relief was reduced from £10 million to £1 million of capital proceeds when Entrepreneurs Relief was introduced in 2008, and funnily enough, renamed Business Asset Disposal Relief in 2020… sound familiar.  Hang around long enough and history repeats itself!

Confusingly, CGT is not a standard rate.  The whole tax system is confusing. There are three CGT bands depending upon what asset have sold, for example:

• 24% on your gains from residential property
• 28% on your gains from ‘carried interest’ if you manage an investment fund
• 20% on your gains from other chargeable assets

The most relevant one to business owners is the 20% rate. This is significantly lower than dividend tax (39.35% for additional rate tax payers or 33.75% for higher rate tax payers) and income tax (45% for additional rate tax payers and 40% for higher rate tax payers) and that’s the perceived problem. The often-said question is “Why should business owners that are making millions from the sale of their company only pay 20% when the ‘rest of us’ are paying ~40%?”. 

For me, it’s a question of risk and reward.  Most higher/additional tax payers are employees of companies and they are generally low risk jobs whether that’s in finance, healthcare or law for example.  Whereas business owners have often had to take significant risks in financing the growth of their business, such as providing personal guarantees or remortgaging their home, employing staff which increases the cost base, developing new products or services which may not be successful, expanding into new geographies with different business cultures and many more reasons.  Headaches and heartaches all along the journey which is stressful and not without risk. 

By disincentivising business owners through harmonisation of tax rates, would you risk your home or your assets to start a new business and employ people?  Where is the upside? This is the challenge with increasing CGT. My personal opinion is that in the November budget we will see an increase but to the carried interest level of 28% rather than all the way up to 40%. At 28%, it is unlikely to have a significant impact on new business owner’s appetite to create new companies… at 40%, I’m not so sure. 

Finally, CGT across all the bands generated ~£15 billion in fiscal year 2024, representing less than 2% of the total UK tax take. The question that the Government need to consider: Is it worth diminishing the desire of risk-taking entrepreneurs to establish new companies and future employers by increasing CGT?