Capital Gains Tax Rise will Deter Small-business Investment
Financiers may be deterred from investing in small firms if the Government increases Capital Gains Tax (CGT) on non-business assets as expected in the emergency Budget on 22 June, the Institute of Directors (IoD) has warned.
The coalition Government has already outlined plans to increase CGT on non-business assets from 18% to 40 or 50%. This would increase the levy on the profit individuals make when they sell second homes or other assets.
It would also raise the tax rate on shares and securities, which represent a large proportion of business investment. According to the IoD, reintroducing taper relief would give an incentive to invest in businesses over the long term.
“Investors such as business angels may be deterred by the expected rise in CGT, and unless you introduce a scheme like taper relief they might decide not to invest,”
said IoD policy spokesman, Alistair Tebbitt.
“Some people invest in projects for four or five years, so to be faced with a huge increase in the tax you pay on any profit is a disincentive.”
The IoD added that the introduction of taper relief could reduce the CGT burden by 10% each year an asset is held to a zero rate.
“Penalising longer-term investors seems counter-productive if the Government wants to promote investment,” said Tebbitt.
However, investment management firm Hargreaves Lansdown head of advice, Danny Cox, disagreed.
“At first sight, the CGT rise might be a disincentive, but I think people will just sit down and think about how they will invest rather than stopping their investment altogether. For example, instead of investing in small businesses through a unit trust, if the CGT increase is implemented they might invest through an offshore investment bond instead.”
“In addition, the coalition has said very clearly that it is going to treat assets related to businesses in a very different way, and so it would be unlikely that we would see any detriment to people investing in small firms or to the businesses themselves.”
Accountancy firm Vantis head of employee services, Kiki Stannard, said that the CGT rise could also hit staff with small numbers of shares in their employer’s business.
“It will be a big blow for regular employees if CGT is increased to match income tax rates, particularly for those who have been encouraged to accumulate holdings of shares in their employer company. Let’s hope that the Government recognises this important group and provides relief to reduce the CGT rate for employees where shares in the employer company are held for a period of time.”
HM Treasury would not comment on the anticipated CGT reforms.