Risk of disruptive asset ‘fire-sales’ if Capital Gains Tax pledge is introduced
Putting Capital Gains Tax (CGT) in line with income tax risks economically disruptive asset fire sales, say leading audit, tax and business advisory firm, Blick Rothenberg.
Sean Drury, head of tax at the firm, said: “Putting CGT rates in line with income tax bands as Labour Leadership hopeful Wes Streeting has pledged would at best create uncertainty and at worst lead to asset fire-sales to crystallise unrealised gains before CGT rises, which would be hugely disruptive at a time when economic stability is needed. Potential elements of the proposals are progressive and there are indications that reliefs will be made available which are “pro growth” but we need to see what they are, maybe a return to ‘Taper Relief’ or ‘Indexation Allowances’. or indeed, something really innovative.”
He added: “The government must get out of a cycle of trying to squeeze more money from the tax base each year and tackle the problem of an ever-shrinking group of people who create wealth, who work and have worked being required to fund an increasing group of people who can’t or don’t create wealth or work.”
Sean said: “Labour leadership candidates will begin differentiating themselves on tax as they appeal to their parliamentary colleagues, but they should not get into a cycle of competing on who can raise our tax burden further.”
He added: “Instead of frequent tinkering with different taxes candidates should look at long term taxation policy which gives certainty, especially in respect of capital investment, entrepreneurial activity, job and wealth creation.”
Malli Kini, co-lead for entrepreneurial services at the firm, said: “Wes Streeting may be right that the current system is not working. But a policy designed to win a leadership contest is rarely optimised for long term economic growth and ignores taxpayer behaviours.”
He added: “What I know from practice is that clients do not wait for tax rules to come into force. The moment the proposed CGT changes gain serious political momentum, founders with exit optionality will crystallise gains early. We saw this play out in real time ahead of the Autumn Budget in 2024. Some of those decisions were right. Some were not. But they were made, and they cannot be unmade.”
Malli said: “For entrepreneurs mid build, the calculation on whether to stay UK resident changes materially at a 45% CGT rate. Not everyone will leave. But the ones most likely to leave are precisely the ones who have already demonstrated they can build something valuable and who have the means and networks to do it somewhere else. That would not be a trivial loss to the UK.”
He added: “On any proposed wealth tax, it is worth reviewing the international evidence before pressing on. France introduced one and abolished it. Sweden introduced one and abolished it. Germany, Italy, Austria and Denmark all tried versions and walked them back. Of the twelve Organisation for Economic Co-operation and Development (OECD) countries that had a net wealth tax in 1990, only three still do. The reason is consistent across every jurisdiction: the rich leave, the revenues disappoint, and the administrative costs are substantial. This is simply what happened, repeatedly, across different political systems and different tax designs.”
Malli said: “The practical problem for clients is then immediate: liquidity. A founder with £20 million tied up in an illiquid private company does not have an annual cheque to write to HMRC. The policy either forces a sale, forces a restructuring, or creates a compliance nightmare. In practice it tends to do all three. Clients will restructure ownership, accelerate succession planning and in some cases move their headquarters outside of the UK.”