The Guardian recently reported that the UK government is considering changes to Capital Gains Tax (CGT), including a potential hike to as much as 39%. While this might seem like a logical step to plug a £25 billion hole in public finances, applying a flat CGT rate across all asset classes could have devastating consequences for the UK’s entrepreneurial ecosystem and long-term competitiveness.
We are at a pivotal moment. AI-driven technology will fundamentally change how we live and work, and the UK should be leveraging its independence to innovate and differentiate. Instead, we’re discussing a tax system that could undermine the very people—entrepreneurs—who create jobs, wealth, and innovation that will shape the UK's future.
Not All Gains Are Equal
One of the major flaws with a high or flat CGT rate, especially one that approaches income tax levels, is that it fails to differentiate between asset classes and risk. Selling a business is not the same as selling property, and the effects on the economy are profoundly different. Entrepreneurs, who take on significant personal and financial risks, should not be taxed the same as property investors or share traders who face far less volatility and far more predictable returns. Similarly, they should not be taxed like venture capital or private equity partners, who benefit from favourable tax treatment without shouldering the same risks.
The risks that entrepreneurs take are immense and often deeply personal. Having experienced both the joy and pain of entrepreneurship myself, I know firsthand that it can take over a decade to build a business that can be sold or listed. Along the way, profits that could have been taken as dividends are reinvested, external financing is raised, and personal stability is sacrificed—all in the hope of creating something meaningful that benefits not only the founder but the broader economy. By taxing business owners at the same rate as those selling second homes, the government is undervaluing their contribution at a time when the UK needs them most.
The Importance of Entrepreneurs and Scale-ups to the UK Economy
Entrepreneurs and scale-up businesses are the engines of the UK economy. Scale-ups make up just 0.5% of UK businesses, yet they contribute £1.3 trillion to the economy and employ over 2.6 million people. These companies drive innovation, create jobs, and fuel the economy—particularly as traditional industries struggle to adapt to technological change.
Scaleup management from The Scaleup Institute (link)
Unlike property portfolios or passive investments, scale-ups are funded through reinvested profits, venture capital, and private equity. Their founders take on enormous risks, invest their own capital, and work tirelessly for years to scale their businesses. Treating the sale of these businesses like any other asset disposal is not only unfair but also threatens to stifle the next wave of UK innovation.
Entrepreneurs’ Relief: Why the Current Cap Is Insufficient
The current Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) allows for a 10% CGT rate on the first £1 million of lifetime gains from selling a business. But this £1 million cap, reduced from £10 million in 2020, is insufficient. While it might be helpful for a micro-business exit, it doesn't adequately reward founders of larger businesses who take on far greater levels of risk, investment, and time.
To truly encourage entrepreneurship in the UK, the government should reinstate Entrepreneurs’ Relief to £10 million or introduce stepped tax rates. A 0% CGT rate on the first £1 million for those taking significant risks, with a 10% rate up to £10 million, would better reflect the long-term value entrepreneurs bring to the economy.
Currently, investors in the Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) pay 0% CGT on gains after holding shares for three years. These successful schemes should remain untouched, but it raises the question: why do investors enjoy better tax treatment than the very entrepreneurs they are backing?
The Role of Entrepreneurs in Solving Global Problems
Entrepreneurs aren’t just about wealth creation—they are the ones tackling the world’s biggest challenges, from climate change to disease eradication, AI development to energy innovation. These are not issues that will be solved by passive investors or property speculators. They require the drive, creativity, and risk-taking that only entrepreneurs bring to the table.
There is also a national security imperative. While on the board of the British Business Bank, I saw the establishment of the National Security Strategic Investment Fund (NSSIF)—the UK government’s venture capital arm aimed at securing dual-use technologies for national security. Entrepreneurs are at the forefront of developing these critical technologies, yet we risk losing their contributions if they are taxed out of existence.
The Laffer Curve and the Risk of High Taxation
Even the government’s own modelling highlights the risks of raising CGT too high. According to The Guardian, internal documents show that a 39% CGT rate could lead to less revenue in the long term, as investors and entrepreneurs find ways to avoid higher taxes.
The Laffer Curve, a theory developed by economist Arthur Laffer—whom I once had the chance to speak with on a call—illustrates the relationship between tax rates and revenue. It warns that if taxes are set too high, they reduce incentives, ultimately shrinking the tax base. The Treasury’s modelling suggests that while a moderate increase to 33% might raise some revenue, pushing CGT to 39% could result in a decline in revenue after five years. This reflects the reality that if taxes become too punitive, people will either stop selling assets or shift their capital to more favourable environments.
A Bleak Future: Capital Flight and Talent Drain
If the government moves ahead with flat, punitive CGT rates, the UK risks facing a capital flight and talent drain. Other countries, such as the US, Singapore, and parts of the EU, are already offering more attractive tax regimes for entrepreneurs and investors. If we make it too difficult to grow and exit businesses here, talent and capital will inevitably move elsewhere.
It’s not just entrepreneurs who will be impacted—venture capital and private equity firms, which provide the funding for high-growth businesses, will also turn their attention to regions with more favourable tax policies. The UK has built a global reputation as a hub for entrepreneurship, but that reputation is fragile, and these proposed tax changes could quickly undermine it.
We Need a More Nuanced Approach to CGT
The UK’s future—particularly in a world increasingly shaped by AI, technological innovation, and global challenges—depends on its entrepreneurs. These are the people who will create the jobs of tomorrow, develop new industries, and drive economic growth. But if we treat them like passive investors, taxing them accordingly, we risk losing the very people who will ensure our global competitiveness.
Rather than applying a flat CGT rate across all asset disposals, the government must take a more nuanced approach. Reinstating Entrepreneurs’ Relief to £10 million would offer meaningful incentives for founders to grow and scale their businesses here. A 0% CGT rate for the first £1 million in gains would further recognise the unique risks these individuals take.
The UK has the talent, creativity, and determination to lead the world in innovation. But we need tax policies that reward risk, encourage investment, and nurture the growth of businesses that will drive our economy forward. Now is the time for bold, targeted policies.
There’s a technological ship leaving the harbour—let’s make sure we’re on it.
Read my related article on "AI UK: Navigating the Future"
Thanks for reading.