06/07/2010
Investors and entrepreneurs have said that the new capital gains tax (CGT) regime could damage investment in growth businesses, according to The Telegraph.
Last week's emergency budget rose CGT from 18% to 28% for higher-rate taxpayers. Luke Johnson, chairman of a private equity firm, said that the new rate would hit business investment hard, especially angel investing.
He explained: "With less money retained after any gain, there is less money to recycle into the next investment. It will effectively mean that angels charge more for their money because their returns are commensurately lower."
Angel investments are risky - many investments are lost when early stage companies fail, so investors look to recoup a massive return on their investment if the company is successful. However, invoice factoring which pays up to 90% of the value of an invoice upfront and is available as soon as you have your first invoice, is proving a popular alternative source of investment for start-ups.
During the emergency budget it was announced that entrepreneur's relief, which provides a 10% tax rate, was extended from lifetime gains of 2 million to 5 million. The relief is available for officers and employees who own more than 5% of a business, if they can prove they're active in the company. Some people claim that the measures announced in the budget would encourage angels to demand a 5% stake in the company and take an active role within the business to qualify for the tax break.
"If someone does not qualify for entrepreneurs' relief, they will now be asked to pay one of the highest rates of CGT in Europe," said Chris Allner, head of private equity at an investment firm. "Why should only the larger stakeholders in an entrepreneurial business benefit from this advantage?"
Laura Nineham