Today’s newsletter comes from our Research Director, Eamonn Ives. Normal service with Philip will resume next week!
Veteran Westminster watchers will know that the long summer months when Parliament is in recess are a breeding ground for less credulous stories to find their way into national newspapers. During ‘Silly Season’, as it’s affectionately known, journalists feed on scraps – with even speculative rumours standing a chance of being written up as if they’re iron-clad facts. So it was with more than a little apprehension when I read in The Guardian that the Chancellor Rachel Reeves is mulling over a new tax grab on high-value properties to raise revenue at the forthcoming Autumn Budget.
According to leaked proposals, the Treasury is considering charging Capital Gains Tax on the sale of homes worth over £1.5 million. Currently, an exemption which shields most main residences from being liable for CGT sees a whopping £31 billion a year slip through the Chancellor’s fingers as taxes forgone – earning it the title of being Britain’s single biggest tax relief. No wonder our cash-strapped Treasury is looking enviously at shaking things up, and that should be reason enough for us to take seriously the fact these ideas are surfacing – Silly Season or not.
What’s all this got to do with entrepreneurship though, I hear you ask? Well, regular readers should be acutely aware that strong agglomeration effects form the basis of just about all fertile startup ecosystems (for the uninitiated, go straight to Building Blocks after reading this newsletter). When people can live in close proximity to one another, the ease with which founders can exchange ideas, attract talented employees, find willing investors, share physical and social infrastructure and so on only increases. Density doesn’t just correlate with economic success, it actively enables it. There’s a reason why London alone routinely receives over two thirds of all venture capital invested in Britain, is a magnet for both domestic and international talent, and is the nation’s foundry bar none for producing cutting-edge startups.
Anything, therefore, that impedes agglomerative forces from taking hold thus also prevents entrepreneurial sparks from flying. And there are few better (or worse?) ways to do that than by putting homeowners on the hook for potentially tens of thousands of extra tax should they wish to move house. As a consequence, people liable for paying the new tax will hang onto property for longer than they otherwise would in an efficient market. Evidence suggests that the construction of new homes may well slow down too, as demand for housing dampens. Altogether, prospective entrepreneurs will find it harder and more expensive to move into economic hotspots, and any well-heeled international talent would be forgiven for thinking twice about relocating to Britain.
We don’t need to rely purely on economic theory here either. Anyone who has had to grapple with the pain of Stamp Duty will be well acquainted with the damaging effects of transaction taxes on property. Empirical evidence from the Office for Budget Responsibility shows that a one percent increase in Stamp Duty causes transactions to fall by between 4.5-7%, depending on the value of the property. Some economists have even argued that property transaction taxes are so harmful that they may even destroy more value than they raise. Static markets serve nobody.
As Philip mentioned a fortnight ago, the reason we’re debating tax rises in the first place is because of the daunting fiscal black hole we’re facing. The Government has shown itself incapable of meaningfully trimming back public spending, has limited room for extra borrowing, and can’t rely on economic growth to save the day. That leaves tax hikes as the only way to try to balance the books – and with a prior promise to not touch VAT, Income Tax or National Insurance Contributions, officials are understandably searching for other routes to bring in extra cash.
By definition, anyone fortunate enough to have profited from the meteoric rise in house prices in Britain over recent decades – even if only on paper – has the proverbial broad shoulders needed to bear further tax hikes. But while such lucky homeowners may be viewed as a politically easy target, we must consider whether the juice is worth the squeeze. Whatever happens at the Autumn Budget, here’s to hoping the Chancellor properly evaluates the second-order effects that taxes like this might have. If the Government is as serious as it says it is about growing the economy, it will ensure idle ideas like this remain exactly that.
(P.S. Speaking of the Autumn Budget, we’ve just opened the next round of our Entrepreneurs Survey for responses. If you’re a founder and want to make your voice heard on the issues that matter to you most, please consider taking ten minutes or less to fill it out.)
What’s your spin?
We’re gathering evidence for our next Female Founders Forum report, which will investigate how university spinouts are created in the UK today, and what policy fixes are needed to support their growth.
If you have spun out a company from a UK university within the last three years (or are in the process of doing so), or are someone who supports spinouts (e.g. through a TTO, university, funder, or advisory organisation), please consider filling in our survey and sharing it with others. And if you’d like to be interviewed for this research or know someone who should, just drop Anastasia a line.