The British Labour government’s recent budget announcement has sent ripples through the tech industry, with significant increases to capital gains tax (CGT) sparking concerns of a potential “brain drain.” While the government maintains the changes will fund public services and still leave the UK with the lowest CGT rate among G7 European economies, the reaction from tech entrepreneurs and investors has been mixed, with many expressing fears about the impact on investment and innovation.
Key Takeaways: UK Capital Gains Tax Hike
- Capital Gains Tax Increased: The lower CGT rate rises to 18% (from 10%), and the higher rate to 24% (from 20%). This is expected to generate an additional £2.5 billion in revenue.
- Business Asset Disposal Relief (BADR) Maintained, But Changes Coming: While the £1 million lifetime limit on CGT relief for entrepreneurs selling their businesses remains, the applicable CGT rate under BADR will increase to 14% in 2025 and 18% in 2026.
- National Insurance Increase: Employers will face a higher National Insurance rate, rising to 15% on salaries above £5,000 (from 13.8% above £9,100).
- Tech Exodus Fears: A survey indicates that a large percentage of tech founders and investors are considering relocating their businesses or themselves abroad in response to the tax changes.
- Mixed Reactions: While some acknowledge the necessity of tax increases, many in the tech sector are urging the government to prioritize policies that support growth and innovation.
‘Brain Drain’ Fears Mount Amidst CGT Hike
Finance Minister Rachel Reeves justified the CGT increase, stating: “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.” She emphasized that even with the increase, the UK would retain the lowest CGT rate among European G7 nations. However, this assurance has done little to quell anxieties within the tech community.
The Startup Coalition, a UK tech lobby group, issued a stark warning prior to the budget announcement, suggesting the potential for a significant “brain drain” if the tax hikes went ahead. Their survey of 713 founders and investors revealed alarming statistics: 89% considered moving abroad, and 72% had already explored this option. Furthermore, 94% stated they would consider starting future ventures outside the UK if the CGT rate increased.
Startup Coalition Responds to Budget Announcement
Dom Hallas, executive director of the Startup Coalition, offered a nuanced response. While acknowledging the survey’s grim findings, he cautioned against overly dramatic interpretations. He stated in a message to CNBC, “Today will be hard for founders seeing taxes on their businesses rise.” However, he also expressed some relief, stating, “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 investment.“
The concerns extend beyond abstract fears. Barney Hussey-Yeo, CEO and co-founder of the fintech app Cleo, publicly stated his consideration of moving to the U.S. last week due to Labour’s perceived anti-business tax plans. While he refrained from commenting directly on his relocation plans following the announcement, he did tell CNBC that the budget was “better than I thought it would be,” suggesting at least some degree of positive surprise.
Focus on Growth and Innovation: A Plea from the Tech Sector
The tech community’s primary concern isn’t simply the tax increases but also the broader implications for investment, innovation, and growth. Many entrepreneurs and investors emphasize the need for a government focused on fostering a thriving startup ecosystem, a message central to Labour’s election campaign promises. The current tax measures perceived threat to that goal is a core source of concern.
Concerns over Funding and Competition
Phil Kwok, co-founder of EasyA, an e-learning startup, highlighted the difficulty early-stage companies face in securing funding. He stated, “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.” He expressed worries that this, combined with other factors, could drive investors and founders towards more favorable markets like the U.S.
Calls for Supportive Regulatory Environment
Hannah Seal, a partner at Index Ventures, underscored the importance of supportive regulations in attracting talent and investment. She urged the government to “pursue reforms that make it easier for startups to attract talent through employee ownership and ensure all regulators prioritise innovation and growth.” She further stressed that such measures would help maintain the UK’s competitive edge in the global innovation landscape.
The need for a holistic approach
Edgar Randall, managing director of UK and Ireland at Dun & Bradstreet, highlighted the necessity of considering the bigger picture. He emphasized that evaluating the overall business environment requires understanding the “cumulative effect of policies impacting growth,” such as energy costs, employer National Insurance contributions, and tax structures relating to capital gains and dividends.” He concludes by noting that “business decisions are influenced on more than just fiscal policy. Entrepreneurs look at the ecosystems as a whole.
The Labour government’s budget presents difficult trade-offs between fiscal responsibility and stimulating economic growth. The long-term consequences of the CGT hike – particularly the potential for a “brain drain” from the tech sector – remain uncertain. The industry and investors are watching closely and anxiously awaiting how government policy translate to innovation.
