Uncertainty over government plans to increase capital gains tax (CGT) could see entrepreneurs and investors hurrying to dispose of assets, business advisers have warned.
The new Conservative-Liberal Democrat coalition document has signaled that it will bring CGT rates for ‘non-business assets’ in line with income tax levels to tackle the deficit (a key component of the Lib Dem election manifesto), which could see the current rate of 18% increased to 40% or even 50%.
Although the document promises ‘generous exemptions for entrepreneurial business activities’, accountancy firm Ernst & Young said uncertainty over what this means could prompt entrepreneurs currently looking to sell to rush through the process.
It is also unclear as to whether the changes will come into force immediately after the coalition’s emergency Budget, expected in June, or at the start of the next tax year in April 2011.
“We don’t yet have any detail about whether these reliefs will be limited in value or restricted to certain types of business activity,” said Andrew Tailby-Falkes, private client services partner at Ernst & Young.
“As such, entrepreneurs who are in the process of selling their business, or who are planning to do so in the near future, may wish to try to get a deal done before the rate change happens. This level of uncertainty could spark a flurry of corporate disposals in the short term.”
Jos White, co-founder of email security business Message Labs and a partner at investment and advisory firm Notion Capital, said the lack of definition over what will qualify as a non-business asset was “very worrying”.
“There is a threat that venture capital will be punished for investing in and encouraging growth in small and medium businesses, which are the cornerstone of any economy,” he told Growing Business.
“Until the government clarifies what it means by ‘generous exemptions’, businesses and investors are right to be very concerned.”
Following the backlash sparked by Labour’s decision to scrap CGT taper relief in 2007 (whereby many business assets were eligible for 10% CGT) business owners were offered ‘Entrepreneurs’ Relief’, where CGT is levied at 10% for the first £1m of gains over a lifetime. The threshold was doubled to £2m in this year’s Budget.
Chris Sanger, head of tax at Ernst & Young, said that allowing the existing Entrepreneurs’ Relief to apply to each investment rather
than over a lifetime could “encourage successful entrepreneurs to
stay in the UK and repeat their successes”.
Meanwhile, White warned the government that insufficient concessions for entrepreneurs and investors could discourage enterprise, stifle investment in growing businesses, and could even be “counter-productive” for the Treasury.
“The most salient point here is that we have recent proof that raising CGT doesn’t even work,” he said. “When CGT was raised in 2007, the tax revenue it generated the following year almost halved.
“This move could cause untold damage to the British economy and risks pushing small British companies into the arms of overseas investors. It is exactly the opposite of what we need to do to secure economic recovery.”
© Crimson Business Ltd. 2010