Entrepreneurs are leaving the UK to avoid major impact from proposed changes to ‘minor’ tax
Source - Office for National Statistics: Relative contribution of each UK tax [raising £1bn or more] to UK Tax Revenue 2023/24
As the Labour government prepares its first budget [to be announced 30 October] UK entrepreneurs are bracing for potential changes to Capital Gains Tax (CGT) which could see the rate more than double, from 20% to 45%.
CGT accounts for just 1.3% of total UK tax receipts, but reform of this ‘minor’ tax will impact UK entrepreneurs disproportionately. In the face of losing a significant portion of the value they have built over years [or even decades], founders and business owners are now accelerating their exit planning and looking at international relocation to mitigate the impact of the anticipated changes.
Office for Budget Responsibility (OBR) data for the 2024-25 tax year shows that CGT is expected to raise £15.2 billion in 2024-25, representing just 1.3% of total UK tax receipts, and making it a relatively minor source of income for the Treasury compared to Income Tax, VAT and National Insurance - three taxes that Labour made a commitment not to increase in their election manifesto.
The Institute for Fiscal Studies and The Institute for Public Policy Research [think tanks that Labour has used previously for policy ideation] have recommended aligning CGT rates to Income Tax rates - which would see the top CGT rate levied on gains from the sale of shares in a company more than double, from 20% to 45%.
How could it impact you?
A worked example
How much CGT you pay depends on your income tax band. Top rate taxpayers currently pay 20% CGT on profits made above their CGT annual allowance of £3,000.
Currently, if you were to sell your business and generate a profit of £3 million from that sale, ‘Business Asset Disposal Relief’ [previously called ‘Entrepreneur’s Relief’] would reduce the CGT payable on the first £1m to 10%, and the balance would be taxed at 20% [less your CGT annual allowance of £3,000].
The CGT you would currently pay on the sale of your business realising a £3m profit would therefore be £499,400.
If Labour increases CGT in line with Income Tax rates, as a top rate taxpayer you will pay CGT of £998,650 instead of £499,400 on the sale of the business.
In the context of the £25bn additional tax income required to meet the funding gap that Labour says it has inherited from the previous government, and the further £15bn required to build a fiscal buffer for the remainder of the parliament, the contribution of an uplift in CGT would be minor in relative terms, but would have a major impact on UK entrepreneurs - the very individuals capable of creating jobs, driving innovation, and delivering the 'growth' that Labour says will underpin the recovery of the UK economy.
The disproportionate impact of CGT increases on UK entrepreneurs
To grow and scale their business venture, founders and entrepreneurs often choose to reinvest their profits back into the business [to the exclusion of making pension contributions or other savings and investments for retirement], viewing it as their primary asset, and in the expectation that the eventual sale of the business will secure their financial freedom and provide the financial security they need in retirement.
Consequently, any increase in Capital Gains Tax (CGT), particularly of the magnitude anticipated in the forthcoming budget, would disproportionately impact these entrepreneurs, as a significant portion of their wealth is tied up in their businesses.
Many are unwilling to see this tax on their life's work
dramatically erode the wealth that they had planned
to rely on in retirement and pass on to their children.
Exit planning and relocation
A significant hike in CGT will act as a catalyst for many UK entrepreneurs to accelerate their exit planning and consider international relocation, with the opportunities presented by significantly more tax-efficient jurisdictions becoming even more attractive.
"Higher CGT rates would increase the incentive
for people to leave the UK before realising gains.”
The Institute for Fiscal Studies [IFS] - 'Capital Gains Tax Reform' [6 October 2024]
By relocating abroad, UK business owners can avoid the punitive CGT that would be levied on the sale of their business, in order to realise and protect the return from their [long term] investment in it.
"Increasing CGT to 40-45 per cent would
take nearly half the value built over decades.
If these changes happen, I’d consider leaving the UK.”
Benjamin Ludzker, CEO of Kays Medical - Financial Times [2 October 2024]
Speak with us to explore your options
As the Budget draws closer, now is the time to explore your options.
As international financial planners, we can help you take control of your financial future, ensuring that whatever changes may come, your wealth is protected and positioned for growth. So if you are thinking about your business exit or relocating away from the UK schedule a consultation with us today or email us at [email protected].
This communication is for information purposes only and does not constitute financial, legal, or tax advice. Please schedule a meeting to receive advice on international financial planning and wealth management.
Current Capital Gains Tax Rates & Annual Allowance
Individuals [including self-employed sole traders, partners in business partnerships, and company owners] are given an annual CGT allowance of £3,000 [down from £6,000 in the 2023/24 tax year and £12,300 in the 2022/23 tax year].
CGT is payable on any profits in excess of the CGT Annual Allowance, from the sale of assets in that tax year. The allowance resets annually on April 6 when the new tax year begins.
- 18% on residential property
- 10% on gains from other chargeable assets
CGT is payable on any profits in excess of the CGT Annual Allowance, from the sale of assets in that tax year. The allowance resets annually on April 6 when the new tax year begins.
- 24% on residential property gains
- 20% on gains from other chargeable assets
- 28% on gains from "carried interest" if you manage an investment fund
[There are different allowances for trustees and those with non-domiciled status]
Business Asset Disposal Relief (previously called 'Entrepreneurs’ Relief' - updated in the Finance Act 2020) reduces the rate of Capital Gains Tax (CGT) on disposals of businesses or business assets from 20% to 10%.
There is a cumulative lifetime limit for qualifying gains of £1 million for disposals on or after 11 March 2020. This is reduced from the previous limit of £10 million for Entrepreneur's Relief purposes.
A claim for Business Asset Disposal Relief must be made on or before the first anniversary of the 31 January following the tax year in which the disposal is made.
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