The British Labor Party is raising capital gains taxes less than feared

LONDON — Britain’s Labor government announced plans Wednesday to increase the capital gains tax rate on share sales, news that provided some relief for tech entrepreneurs who feared an intensified tax attack on the wealthy.

Chancellor of the Exchequer Rachel Reeves on Wednesday increased capital gains tax (CGT) – a levy on the profit investors make from the sale of an investment – ​​as part of her far-reaching Budget announcement. The lower capital gains tax rate will increase from 10% to 18%, while the higher rate will rise from 20% to 24%, Reeves said. The tax increases are expected to raise £2.5 billion.

“We must boost growth, promote entrepreneurship and support wealth creation, while at the same time increasing the revenues needed to fund our public services and restore our public finances,” Reeves said, adding that Britain, even with the higher rate, “still the lowest capital gains tax rate of all European G7 economies.”

Reeves retained the £1m lifetime limit on capital gains from the sale of all or part of a business under the BADR (Business Asset Desinction Relief), allaying fears from entrepreneurs that the business tax relief scheme would become abolished.

However, she added that the CGT rate applied to entrepreneurs selling all or part of their business under BADR will increase to 14% in 2025 and 18% a year later. She stressed that this still represents a “significant gap compared to the higher capital gains tax rate”.

In a less welcome move for businesses, Reeves also announced plans to increase the rate of National Insurance (NI) – a tax on income – for employers. The current rate is 13.8% on an employee’s income above £9,100 per year. This is expected to rise to 15% on salaries above £5,000 per year.

The changes are just a small part of the sweeping budget changes the newly elected Labor government set out in its debut budget on Wednesday in a bid to plug a billion-pound funding gap in the public finances.

Reeves’ announcement comes after speculation about changes to capital gains taxes sparked a backlash from tech founders and investors. Even before Reeves’ announcement, expectations that CGT would increase had caused fear among tech founders across the country.

On Monday, the British technology lobby group Startup Coalition said warned in a blog post that there was a risk that Reeves’ tax plans could result in a technological ‘brain drain’.

A survey of 713 founders and investors, conducted by Startup Coalition with private company database Beauhurst, found that 89% of respondents would consider moving themselves or their business abroad, while 72% had already explored this option.

The survey data also showed that 94% of founders would consider starting a future business outside Britain if the government increased the CGT rate.

Dom Hallas, executive director of Startup Coalition, said that while the survey results were dismal, he doesn’t expect founders to “run when the going gets tough” because they are “not naive about the role of taxes in society.”

Following Reeves’ budget speech, Hallas told CNBC via text message: “Any budget with increases in CGT and NI, gradual increases in BADR and rising taxes on investors is never easy and today it will be difficult for founders to get taxes on their companies to stand up.”

However, he added: “We appreciate that the government has listened to ensure that entrepreneurs’ worst fears have not been realized and that a balance has been achieved, including maintaining all key R&D activities. [research and development] investment.”

Barney Hussey-Yeo, CEO and co-founder of financial technology app Cleo, told CNBC last week that he was considering a move to the US as a result of Labor’s tax plans.

“There are so many founders who are already leaving, or are considering leaving – and they are excited to go to Silicon Valley,” Hussey-Yeo told CNBC on the sidelines of venture capital firm Accel’s EMEA Fintech Summit in London last week.

Hussey-Yeo did not respond to a request for comment on Wednesday about whether he still plans to move abroad. However, he told CNBC that the budget announcement was “better than I thought it would be,” adding that it “seems like they listened to business owners.”

Tech entrepreneurs and investors are urging the government to return to its focus on promoting growth and innovation in Britain, messages that were key to Labour’s election manifesto ahead of the landslide victory that made Keir Starmer Prime Minister became.

“We are already seeing early-stage companies in Britain struggling to secure pre-seed and seed funding, while VCs here have a lower risk appetite. A higher CGT will act as a further deterrent,” said Phil Kwok, co-founder of EasyA . , an e-learning startup, told CNBC via email.

“With all the factors at play, we could see investors and the next generation of founders looking to other markets like the US,” he added.

Hannah Seal, a partner at Index Ventures, told CNBC that the government should “pursue reforms that make it easier for startups to attract talent through employee ownership and ensure that all regulators prioritize innovation and growth.”

“Startup-friendly policies like this will be essential to demonstrate Britain’s commitment to remaining a globally competitive hub for innovation, especially in light of today’s announcements,” she added.

Edgar Randall, managing director for Britain and Ireland at data and analytics firm Dun & Bradstreet, told CNBC that to stay competitive, the government must “weigh the cumulative effect of policies that impact growth.”

These include policies affecting energy costs, employer national insurance contributions and tax structures on capital gains and dividends.

Ultimately, business decisions aren’t just influenced by fiscal policy, Randall said, adding. ‘entrepreneurs look at the ecosystems [as] a whole.”