A future increase to capital gains tax (CGT) could lead to a huge drop in investment into small- and medium-sized enterprises (SMEs), research has found.
A survey from specialist private client investment business Connection Capital has showed that 42 per cent of high-net-worth (HNW) private investors said they would invest less in unquoted SMEs if CGT is increased to the same level as income tax.
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This was suggested by a Treasury-instigated review of the tax by the Office for Tax Simplification last year and although has not been adopted, many private investors still think it remains a strong possibility, as the chancellor seeks to repair the public finances post-Covid.
The survey found that a quarter of private investors would reduce their investments into SMEs by 50 per cent or more, while almost one in five (18 per cent) would invest 25 per cent less.
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According to the British Venture Capital Association (BVCA), 27 per cent of the £5.4bn of private equity and venture capital funds raised in the UK in 2019 came from private individuals, equating to around £1.5bn of investment.
Connection Capital’s research found that private investors see generating capital gains as one of the most attractive rewards for the risk when investing in small businesses.
More than seven in 10 (71 per cent) said that achieving returns that are capital in nature is an important characteristic when looking for any new alternative asset investment opportunity, compared to just 22 per cent who cited this as important for opportunities that produce income.
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“It’s not just investors who would be hit by a CGT hike – small and medium sized businesses would lose out too,” said Claire Madden, managing partner at Connection Capital.
“Private capital was critical to the recovery after the financial crisis of 2008, and it will be again as we repair the economic damage wrought by the Covid-19 pandemic.
“Cutting off a vital source of funding to SMEs could threaten businesses’ ability to rebound, with a knock-on effect on employment and growth and, ironically, tax receipts.
“Government support schemes won’t last indefinitely, and there are question marks around how much debt businesses will want or be able to shoulder going forward, so private investment is an important option.
“Private investors are keen to support SMEs – therefore, it’s vital it remains financially attractive for them to do so. Otherwise, many will conclude that it’s simply not worth it.
“The risk involved in backing SMEs is greater than more conventional kinds of investment, such as buying listed shares or purchasing a second property and should, therefore, be treated differently in the tax system. Any changes to CGT must take this into account.”