Increasing capital gains tax (CGT) will not lead to lower investment, slower growth or reduced entrepreneurship from millionaires, according to analysis from the Institute for Public Policy Research (IPPR).

The think tank noted that, despite recent claims, several millionaire entrepreneurs it had consulted said that aligning CGT with income tax would not deter them from making future investments or encourage them to leave the UK.

It argued that CGT was not the primary driver of investment decisions, and that entrepreneurs and investors focus more on issues such as access to financing, market opportunities, and broader economic conditions.

The IPPR added that capital gains only become relevant at the point of exit, and only a minority of entrepreneurs were swayed by CGT when they think about starting out.

Additionally, the majority of capital investment in the UK comes from institutional investors, who are largely exempt from CGT, rather than individual entrepreneurs, the report said.

The paper also highlighted that low CGT was poor value for money, as it applies equally to genuine entrepreneurs and passive investors who benefit from simply owning assets.

At least half of all capital gains come from passive asset ownership rather than entrepreneurship, with the think tank stating that offering a tax break on these gains “does nothing” to generate investment or growth.

“Reforms to CGT will mainly affect passive asset owners rather than entrepreneurs,” the report said.

The IPPR pointed to other, more targeted, policies that were “far more effective” at directly supporting entrepreneurship, innovation and business investment, and urged the government to expand and refine these initiatives.

It argued that entrepreneurs do not operate in a vacuum, and the millionaires it spoke to raised the importance of the government’s contribution to their business success through providing a healthy and well-educated workforce.

The think tank therefore called on the government to equalise CGT with income tax, which it said would raise £14bn a year.

It noted that CGT was only paid by around 0.65 per cent of the adult population, while most CGT revenue comes from around 0.02 per cent of the population who make gains of more than £1m.

“The recent fearmongering from some that increasing CGT will take the economy back to the stone ages is pure hyperbole,” commented IPPR research fellow and report author, Pranesh Narayanan.

“It was famously pro-growth Conservative chancellor Nigel Lawson who equalised CGT with income tax rates in the first place.

“We have spoken to multiple millionaires in the last few weeks who have made it clear that equalising CGT with income tax would make absolutely no difference to their investment or entrepreneurial pursuits.”

However, in response to the paper, Hargreaves Lansdown head of personal finance, Sarah Coles, said that while it was “all very well” saying that millionaires could take a CGT hike on the chin, these were “far from the only people” who would be hit hard by the tax rise.

“Ordinary investors with assets outside a stocks and shares ISA could see their tax rate double, which risks flooring them with a horrible tax bill, or forcing them to change their behaviour – which could cause a whole host of other issues,” she stated.

“Hiking the headline CGT rate could put people off investment altogether - and erect another barrier to entry for new investors. It might also stop people from selling current assets, because they’re worried about the tax. This could force them to make decisions that ultimately leave them worse off.

“It's no wonder that our research shows that among higher rate taxpayers, changes to CGT are the fourth most pressing Budget worry - after income tax, pension taxes and inheritance tax. Some 7 per cent are worried about the impact it could have on them.

“Suggestions that the rate on stocks and shares could rise to match that on property would also risk damaging confidence in investing. There should be a difference between the treatment of capital gains derived from growing companies to that of a fixed asset such as a house or land, if we are going to boost business growth in the UK. There is scope to widen this distinction within the CGT system – not narrow it.”

---