How Labour’s capital gains tax threats are prompting entrepreneur panic
James Warrington
6 min read
(L-R) Labour Party Deputy leader Angela Rayner, Labour Party leader Keir Starmer, Labour Party Shadow Chancellor Rachel Reeves - Leon Neal/Getty Images
François Hollande was no match for France’s entrepreneurs.
When the country’s socialist president set out plans to double capital gains tax to 60pc in 2012, a group of around 60,000 entrepreneurs rallied on social media to block the move.
The group’s nickname, les pigeons, came from French slang for “suckers” or “fall guy”. In other words, they did not want Hollande to treat them like suckers.
Just days later, Pierre Moscovici, France’s finance minister at the time, was forced into an embarrassing climbdown.
The mooted tax raid, hinted by deputy leader Angela Rayner, has sparked panic among British entrepreneurs, raising the threat that many founders could be forced to sell up or move abroad.
“A return to 1970s levels of taxation will certainly make founders reconsider,” says Rob Kniaz, partner at Hoxton Ventures, which invested in Deliveroo and Darktrace.
“The Government needs to decide if it wants 10-28pc of something or 50pc of nothing.”
Rayner’s suggestion last week that a Labour government would raise taxes on savings and investments sparked instant concern among businesses.
Criticising Prime Minister Rishi Sunak’s tax return, Rayner attacked what she called “a Tory tax system where the PM pays a far lower tax rate than working people”.
A large part of the Prime Minister’s tax charge was booked as capital gains. Despite earning £5m over three years, he paid an effective tax rate of 22pc.
Earlier this month The Telegraph disclosed that a large increase in capital gains tax is on the table if Sir Keir Starmer wins the next election.
For entrepreneurs considering a sale, it means there may be a narrow window to cash in and avoid a hefty bill from the taxman.
“Already I’m hearing entrepreneurs saying they are selling their companies because of the fear of the potential capital gains tax increase,” says Brent Hoberman, co-founder of Made.com and chairman of Founders Forum.
“So yes, I think you’ll get a short-term flood of people selling their companies and then net the tax would be down after that for some time.”
Andy Hodgetts, corporate finance partner at advisers Buzzacott, adds: “In the next 18 to 24 month period you will see a lot of transactions that will be tax-driven. Driven by a fear over what Labour will do.”
He adds that the market is now entering a “golden window” when founders can do deals without the risk of prices being deflated.
Charlie Mullins, the entrepreneur who sold Pimlico Plumbers for £140m two years ago, says many founders will “undoubtedly” be forced into a faster sale.
“If they’re thinking of doing it in a year or two they’ll just bring it forward,” he says.
Such is the controversy over the potential tax raid that fault lines are starting to emerge even within the shadow Cabinet.
Rachel Reeves, the shadow chancellor, on Thursday insisted she had no plans to increase capital gains tax, despite Rayner’s comments.
She told BBC Radio 4’s Today programme: “We also have said we want Britain to be the best place to start and grow a business.”
Richard Goold, partner at Wilson Sonsini, a law firm advising tech startups, points out that many founders are not overly concerned with tax in the early stages of their company.
“Paying less tax is great, but in the early days building the company up it is not something they are particularly focused on,” he says.
Still, Goold acknowledges that if the rate of tax were to double, people would be “violently opposed”.
He adds: “It would be a disincentive to being an entrepreneur.”
For many founders, though, even the prospect of a capital gains tax raid will be enough to make them pull the trigger.
“Because of the time it takes to do a transaction, the impact is about belief, whether or not they put it through,” says Hodgetts.
The corporate adviser adds that plenty of entrepreneurs are seeking advice on when is best to exit their business to avoid a hefty tax bill.
Hodgetts adds he had recently spoken to an entrepreneur “in his mid-50s and who wants to get out at some point”.
“I said to him: ‘If you feel like you want to sell anyway, you don’t want to wait until six months before a [government] Budget when buyers will know you are under pressure.”
Yet for the UK tech sector, fresh from its brush with catastrophe following the collapse of Silicon Valley Bank, there are more fundamental concerns at stake if Labour pushes ahead with tax rises.
“The question is, would it make the UK a less attractive place to start your business than other countries in Europe?” says Hoberman.
“Unless they [Labour] did a raft of other exciting proposals to encourage entrepreneurship, all sorts of incentives, I can’t see how it’s not a large negative.”
This risk was highlighted in 2021, when an increase in capital gains tax was being considered by then-Chancellor Rishi Sunak to bring the top rate in-line with income tax, then at 45pc.
A survey conducted by start-up consultancy Beauhurst revealed that 85pc of founders would consider moving their companies abroad if the tax rise went ahead.
Up to 88pc of start-up jobs would also be at risk of moving abroad, according to the research, while 90pc of founders said it would be harder to attract top talent.
“For a lot of entrepreneurs it does not make sense to work that hard for so little reward,” says Henry Whorwood of Beauhurst.
For Hoberman, it is crucial that Labour does not focus on short-term political gain at the expense of the UK’s tech sector.
“I would want any potential incoming Labour government to demonstrate that they are not using populist policies that will benefit them politically in the short term, but will damage the economy,” he says.
“And I think raising capital gains tax for entrepreneurs would be one of those.”
Mullins is more damning in his verdict. “I think it just goes to show that Labour have never really been a business party,” he says.
“I just don’t understand why they want to penalise successful, wealthy people that are creating jobs, creating opportunities and investing money in the UK.”
While France managed to avoid a flight of “les pigeons” by cancelling its tax raid, Britain risks driving away founders with a capital gains crackdown.
