First, if you’ve not yet completed our latest Entrepreneurs Survey, what better way to spend this sunny Bank Holiday? It only takes around 10 minutes, but its insights and impact — as you’ll read below — go much further. Politicians can’t make the UK the best place in the world to start and grow a business if they don’t know what entrepreneurs need. Tell them.
Some policy areas are neglected. Others are tinkered with to death. Capital gains tax sits firmly in the second camp. In the last fifteen years, the headline CGT rate has been raised, cut, raised again, and split into multiple sub-rates. And now equalising it with income tax is being seriously discussed in Westminster again.
Entrepreneurs’ Relief was introduced with a £1 million lifetime cap, expanded to £2 million, then £5 million, then £10 million, then cut back to £1 million, then rebranded as Business Asset Disposal Relief (BADR), then ratcheted from 10% to 14%, to 18%. The last clean settlement was Lawson in 1988. Every Chancellor since has felt obliged to fiddle.
BADR is now capped at a level low enough to be irrelevant for serious scaling, and has been continuously revised in ways that signal political instability to anyone considering where to base their business. We have, in effect, the worst of both worlds.
The behaviour the Treasury actually wants — or should — is reinvestment. Capital gains are taxed differently from labour income to attract entrepreneurs from abroad, keep the ones we have, and incentivise them to do it again. In our recent Entrepreneurs Survey, 72% of founders told us they would invest the proceeds of a more generous BADR in someone else’s startup, while 70% said they would launch a new venture. The reinvestment instinct is overwhelming, and it is the thing the UK tax system most needs to protect.
The case for equalising CGT with income tax comes dressed in sophisticated economics: get the base design right — exempt a “normal” return on capital through a rate-of-return allowance, make losses more generously offsettable — and the headline rate stops mattering. It is a serious argument. It is also, as the tax policy expert Tom Clougherty argued in The Times yesterday, one that does not survive contact with how entrepreneurship actually works.
On losses, Clougherty notes the basic asymmetry: “an entrepreneur’s potential losses are uncapped; their upside is highly uncertain. If you tax the gains without subsidising the losses (and you should definitely not subsidise losses) you are skewing incentives around risk-taking.” On the rate-of-return allowance, his point is even sharper: it “assumes that any returns above a ‘risk-free’ rate are ‘unearned rents’ — unrelated to skill, effort, or the risks taken. This assumption does not hold up in the real world. High returns on capital are not random strokes of luck — often they are a manifestation of precisely the qualities that drive economic progress.”
That is the substantive case. Then there is the practical one. The most carefully designed CGT regime in the world is useless if founders can’t plan around it. A founder building a company is making a ten- to fifteen-year bet. The UK tax system has been resetting every year.
CGT does more than raise revenue. It tells founders what the country thinks long-term, illiquid, risk-bearing capital is worth. A regime that keeps changing tells them something else: that the tax treatment of their decade-long bet will turn on a single Budget, election or leadership race.
The behavioural evidence is visible. Pre-Budget realisation spikes are now a standard feature of UK tax data, as founders rush to crystallise gains ahead of expected changes. The 2024 spike was the largest on record. Our own polling found that 62% of founders personally know an entrepreneur who sold up or left the UK after the 2024 Budget. Seven in ten know one planning to leave because of the current or expected tax regime. None of this is hypothetical — which is why over a thousand of Britain’s most ambitious founders, including those behind Synthesia, OakNorth, Zopa and CMR Surgical, signed our letter to the Chancellor when this was last being seriously considered.
Clougherty puts the pattern starkly: “If you look at the blended marginal tax rate on capital income — combining the effects of corporation tax, CGT and dividend tax — since 2000, you see two big spikes: one immediately after the financial crisis, and another after the pandemic. Why do we keep responding to economic crises by hiking taxes on investment? Could this possibly have anything to do with our failure to bounce back from these downturns?”
A tax system can be defensible at every point in time and still be impossible to plan around, because founders are not pricing today’s rate — they are pricing the range of rates they expect to face over the next decade. Britain has spent 15 years teaching them to expect the worst.
Sweden faced the same question in 2003: how to tax founder gains without choking off new ventures. It didn’t cut the rate. It changed when the rate applied. Corporate tax on capital gains from selling shares in unlisted companies was deferred indefinitely, provided the proceeds went back into other unlisted companies. Founders who exit and consume pay tax. Founders who exit and reinvest defer it.
As Luis Garicano and Per Strömberg set out, Sweden — a country of 10 million — has produced more unicorns per capita than almost anywhere in the world. Alumni of the first wave of Swedish tech successes have founded and funded the second because the 2003 reform let them recycle exit proceeds at scale. It worked because it targeted people who already had deal flow, judgement and operating experience — and because, crucially, it has been left largely alone for over two decades. Reward reinvestment, then get out of the way.
This isn’t a left-right argument. One of Mark Carney’s first acts as Canadian Prime Minister, in March 2025, was to cancel his predecessor’s planned increase to the capital gains inclusion rate. The centre-left Carney framed it as catalysing investment and rewarding the people who take risks to build things.
The Treasury will point out that income reclassification through closely held companies is a real problem. They are right. Owner-managers can dress up labour income as capital gains to lower their tax bill, and the rate gap creates the opportunity. But the answer is not a blunt rate hike on every capital gain. It is to fix the specific structures that allow the reclassification in the first place. Punishing genuine entrepreneurship to close a definitional loophole is a category error.
Any reform has to pass two tests: does it keep founders building and reinvesting, and can they plan around it for a decade? Everything else is just tinkering.
YEF @SXSW
On Tuesday, we’ll be inviting a small number of our Young Entrepreneurs Forum to an event at SXSW London. It comes with a free pass to the entire festival, which normally costs over £1,000. If you’re not a member of the group, sign up for free today. Spaces are very limited for this one, but there will be plenty more events on the horizon.