New CGT rate could make angel investment more expensive

28 June 2010

The new capital gains tax system may run the risk of pushing up the cost of business angel investments, it has been claimed.

Capital gains tax rose to 28 per cent for higher rate taxpayers in the Budget, although the 10 per cent entrepreneurs' relief rate was extended to cover £5 million worth of lifetime gains.

But Luke Johnson, chairman of private equity firm Risk Capital Partners, has said that the move could hit the amount of investment money available.

Mr Johnson argued: "With less money retained after any gain, there is less money to recycle into the next investment. It will effectively mean that angels charge more for their money because their returns are commensurately lower."

There are worries, too, that the gap between the new CGT rate and entrepreneurs' relief, which is open to officers of a company who own more than 5 per cent of the business, could lead to more investors wanting a 5 per cent stake in an enterprise and taking a more involved role, so adding to the cost of investment.

However, Anthony Clarke, chairman of the British Business Angels Association (BBAA), considered that the new CGT regime would not be too onerous for investors, adding that more angels may choose to invest through the Enterprise Investment Scheme (EIS), which provides tax reliefs for investors.

Mr Clarke said: "I'm sure there are a lot of private investors who don't appreciate the benefits of the EIS. With the EIS relief, angels don't pay CGT if they buy ordinary shares in qualifying companies."

But he did urge an overhaul of the scheme so that it treats angels on a more equitable footing with venture capitalists.

Mr Clarke said: "It's a good scheme that's past its sell by date. There hasn't been a review since of the qualifying criteria since the mid-90s. We've been lobbying the Treasury to allow preference shares under the EIS so we're more aligned with the venture capitalists."