Sigh of relief for UK tech founders as Labour hikes capital gains tax by less than feared

LONDON — Britain’s Labour government on Wednesday announced plans to raise the rate of capital gains tax on share sales, news that offered some relief for technology entrepreneurs who feared a more intense tax raid on the wealthy.

Finance Minister Rachel Reeves on Wednesday hiked 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 be increased to 18% from 10%, while the higher rate will climb to 24% from 20%, Reeves said. The tax hikes are expected to bring in £2.5 billion.

“We need to drive growth, promote entrepreneurship and support wealth creation, while raising the revenue required to fund our public services and restore our public finances,” Reeves said, adding that, even with the higher rate, the U.K. would “still have the lowest capital-gains tax rate of any European G7 economy.”

Reeves maintained the £1 million lifetime limit on capital gains from the sale of all or part of a company under business asset disposal relief (BADR), quashing fears from entrepreneurs that the tax relief scheme for entrepreneurs would be scrapped.

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

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

The changes form only a small part of sweeping fiscal changes the recently-elected Labour government laid out in its debut budget Wednesday in an attempt to close a multibillion-pound funding gap in public finances.

Reeves’ announcement comes after speculation over capital gains tax changes caused a backlash from tech founders and investors. Even prior to Reeves’ announcement, the anticipation that CGT would increase had caused angst for tech founders across the country.

On Monday, British tech lobby group Startup Coalition warned in a blog post that there was a risk Reeves’ tax plans could result in a tech “brain drain.”

A survey of 713 founders and investors conducted by Startup Coalition with private company database Beauhurst, showed that 89% of those polled would consider moving themselves or their business abroad, with 72% having already explored this possibility.

The survey data also showed that 94% of founders would consider starting a future company outside of the U.K. if the government were to raise the CGT rate.

Dom Hallas, executive director of Startup Coalition, said that while the survey findings were grim, he doesn’t expect founders will “flee if things get hard” as they “aren’t naive about the role of taxes in society.”

Following Reeves’ budget speech, Hallas told CNBC via text message that, “Any budget with increases to CGT and NI, gradual increases to BADR and taxes on investors going up, is never easy and today will be hard for founders seeing taxes on their businesses rise.”

However, he added: “We appreciate that the Government has listened to ensure that entrepreneurs’ biggest fears have not materialised and some balance has been struck including maintaining all important R&D [research and development] investment.”

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

“There’s so many founders already leaving, or already considering leaving — and they’re 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 didn’t respond to a request for comment Wednesday on whether he still plans to move abroad. However, he told CNBC that the budget announcement was “better than I thought it would be,” adding it “seems like they listened” to entrepreneurs.

Paul Taylor, CEO of London-headquartered fintech firm Thought Machine, said that though it was reassuring to see the government listening to founder concerns, increases to NI contributions would prove costly. Thought Machine’s U.K. payroll spend is expected to spike by £800,000 as a result.

“This is a significant amount for companies like us, which rely on investor capital and already face cost pressures and targets,” Taylor told CNBC Wednesday. “Nearly all emerging tech businesses run on investor capital, and this increase sets them back on their path to profitability.”

Tech entrepreneurs and investors are urging the government to return to its focus on fostering growth and innovation in the U.K., messages which were key to Labour’s election manifesto prior to the landslide win that saw Keir Starmer become prime minister.

“We’re already seeing early-stage firms in the UK struggle securing pre-seed and seed funding, with VCs here having a lower risk appetite. A higher CGT will act as a further deterrent,” 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 another markets like the U.S.,” 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 all regulators prioritise innovation and growth.”

“Startup-friendly policies like these will be essential to signal the U.K.’s commitment to remaining a globally competitive hub for innovation, especially in light of today’s announcements,” she added.

Edgar Randall, managing director of U.K. and Ireland at data and analytics firm Dun & Bradstreet, told CNBC that in order to remain competitive, the government should “weigh the cumulative effect of policies impacting growth.”

These include policies impacting energy costs, employer National Insurance contributions, and tax structures on capital gains and dividends.

Ultimately, “business decisions are influenced on more than just fiscal policy,” Randall said, adding that. ‘entrepreneurs look at the ecosystems [as] a whole.”