Budget Puts the Squeeze Business Angels

CGT rise will put the squeeze on business angels

It’s the day after one of the most eagerly anticipated, or should that be dreaded? Budgets of recent times. Budgets are becoming like buses, normally you wait ages for one and suddenly two come along in just a few months.

There was little in the last one to encourage business angels or entrepreneurs in the UK, but in this latest emergency Budget the Chancellor has gone out of his way to show that Britain may be weighed down by a mammoth budget deficit to reduce, but it is still open for business. Or is it?

Business groups on the whole have welcomed some of the measures introduced to help entrepreneurs and owners of SMEs. The 1 per cent cut to companies’ tax the new £5 million threshold for entrepreneurs’ relief on CGT have been applauded as have measures to reduce National Insurance liabilities.

This all sounds too good to be true, is Mr Osborne really giving a leg up to entrepreneurs so that they can get Britain back on the road to recovery and avoid the possibility of a double dip recession in the UK?

Perhaps, but as with all Budgets, it depends how you look at it. Sure all the headline grabbing measures will show that enterprise is being encouraged. It is also worth noting that entrepreneurs can now claim Capital Gains Tax relief on up to £5m worth of business sales in a lifetime – this is up from £2m in March.

To help fast growing SMEs starved of growth funding the government plans to introduce a new Enterprise Capital Growth Fund to provide a £37.5 million boost of equity finance to SMEs. The Enterprise Finance Guarantee is also being increased by £200 million to support additional lending of up to £700 million to for small businesses until the end of March 2011.

All this funding is great if you are a growing business and able to gain access to it, but as we have seen in the past 12-months start-ups are struggling to secure funding from banks. But the banks have been holding onto their purse strings, which means start-ups have had to turn to business angels for help. The problem is that again there is little in the budget to encourage business angels.

The sharp rise in Capital Gains Tax from 18% to 28% is likely to discourage rather than encourage investment in the UK. Despite the headline ‘good news’ the entrepreneurs relief doesn’t cover all of those involved in the investment chain. Those business angels who are affected by this hike in CGT are likely to decide that the risks outweigh the rewards when it comes to investing at seed stage. This would cut off the vital supply of capital needed by those start-up businesses who can’t secure funding elsewhere, stifling innovation in the process.

Britain had the lower CGT rate (18%) than most other countries, until last night just behind Brazil (15%) and the US (15%). According to a table compiled by Ernst and Young, Britain has now dropped from 7th to 15th with a higher CGT rate than China’s 22%.

Britain’s slide down the scale of competitiveness with these other countries is a concern, and could make it more attractive to invest abroad where the rates are more attractive.

It could have been worse. The worse case scenario of a rise to 40% and without the measures introduced in the Budget to help entrepreneurs would have dealt a heavy blow to hopes of recovery. Everyone in the UK knows that payback time has come, but time will tell if business angels will still be willing to take a risk on early stage growth businesses. The incentives should have been spread more evenly between entrepreneurs and those other links in the investment chain.

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  • I have to agree with these comments.

    Over the last few weeks in meetings with entrepreneurs around the south east, including a http://www.efactor.com event in London, fears have been expressed around the (previously) forthcoming budget. At least some of the rumours/speculation haven’t happened, but with the CGT changes it is less attractive.

    I guess the upside is we’re beyond the uncertainty of the last couple of months. Lets see how it pans out…

  • Interesting thoughts Brett.

    I think most business angels will either be looking to make up the remainder of their £5m life time relief (but this will require a minimum percentage holding) or they’ll need to use the EIS (enterprise relief scheme).

    However these changes are more likely to put off large scale micro investments – but it is not clear that these were taking off as fast as expected?

    Lastly, if it is Mum or Dad providing a £5k seed funding – it might be easier and more efficient to treat this as a gift.

    Either way, there are some significant changes here that need to be incorporated into any investment strategy.

    Best regards

    Ps. The capital allowance changed will raise costs of purchasing capital equipment – which will almost certainly increase the barrier to entry for manufacturing start-ups.

  • AngelsDen has over 3400 angels registered and this is NOT what they are reporting.
    It’s makes good headlines, but IF you have money to invest … you need to put it somewhere … quoted share portfolios WILL be less attractive, but given that most equity investments are made under EIS (and thus are exempt from CGT) equity funding is actually MORE attractive.
    We now have over 430 angels a day visiting the site, looking for deals to invest in … this is 11% up, since the budget.
    Sorry to be a party pooper.
  • Neil Lewis
    Hi Bill – indeed – it does seem to make the EIS structure all the more important/ valuable?

    Are you finding that EIS is now an essential requirement for any pitch?


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