UK to scare off entrepreneurs
The UK is proposing to bring in a flat rate capital gains tax (CGT) at 18%. The base CGT tax at current is 40% but there is relief for certain assets and holding periods. One such relief is "business taper relief", which incurs a 50% relief for all business assets held for 1 year, and a 75% relief for business assets held for two or more years. Thus a small business owner who sold his business after two years would receive 75% relief on the CGT tax yielding a only a 10% tax.
With the new proposal in place there is to be no more taper relief. The sale of business, and other, assets will be taxed at 18%. This may not seem tragic to you but bare in mind a sole person who has slaved 100 hours a week and invested all of his life savings into starting up a business, has paid ~20% corporate tax on all earnings, and then up to ~40% personal income tax on any salary that he wishes to take whilst running the business.
This will affect me greatly, in July 2006 I founded a new company (a shell essentially) OBDTech Limited which I would use to develop my next business or idea as soon as I was ready to.
One of my proposed business plans involves generating £1.6m yearly revenue and a target sale price of £5m after three years of operation. The UK government would of received the following taxes from my operating the business in the UK:
- Corporate tax over three years = £960,000
- Income tax on 5 salaries totalling £200,000 for three years = £180,000
- VAT (sales tax) over three years = £840,000
- 10% CGT tax when the business sold = £500,000
Total tax: £2,480,000. This business would of kept 5 employees in full time employment.
My post tax gain from selling my 51% of the business would of been £2,295,000. With the new proposal in place I would receive £2,091,000 a post tax difference of £204,000.
This increase of 8% tax on my final earnings is enough to make me consider relocating myself and/or the business outside of the UK, potentially losing the UK £2,480,000 in tax revenue. I'm sure a lot of entrepreneurs are thinking along the same lines.
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