Good news for investment in UK SMEs as Treasury mothballs proposals to raise CGT

News: Insight & Opinion | 14 December 2021

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The decision by the Treasury to mothball proposals to raise capital gains tax (CGT) is extremely good news for investment into UK small and medium sized businesses (SMEs), says Connection Capital, the specialist private client investment business.

  • Private investors are a vital source of investment in small businesses
  • SMEs need permanent capital solutions now more than ever to navigate and drive recovery

In a recent letter* to the Office for Tax Simplification (OTS), the Treasury indicated it is not intending to proceed at the present time with suggestions that CGT rates could be increased to bring them into in line with income tax, but that it will continue to keep the tax system under review. The Chancellor of the Exchequer had asked the OTS to investigate whether CGT should be reformed.

Claire Madden, Partner at Connection Capital says, “This is hugely encouraging for small businesses who need external capital to support their success and the private investors who are keen to back them.”

“Hitting investors in the pocket would hurt SMEs too. CGT seems like an easy target for tax rises, but when it comes to investing in small businesses, investors need to have a decent potential reward in prospect, to make it worth taking the risk with their money.”

“Now is not the right time to be hiking CGT because doing so discourages investment, just as small businesses need it more than ever to weather the storms whipped up by Covid-19, and to set them on the right course for recovery.”

“The Treasury had good reasons for considering tax increases, given that the pandemic has put incredible strain on the public finances, but the way to solve that problem is to have UK plc firing on all cylinders to get the economy back to full power.”

“98% of British businesses are SMEs**, and private investment is essential to sustain them through the challenges caused by today’s difficult trading conditions, build resilience, protect jobs, encourage entrepreneurship and position for future growth.”

“Although banks stepped in to provide government-backed loans at the start of the pandemic, there’s no telling whether SMEs will be able to extend or increase their borrowing going forward, or what terms they will be offered. If the experience of many small businesses after the financial crisis is anything to go by, suitable bank lending may not be easy for SMEs to access as we look ahead.”

“What’s needed now are not temporary, debt-based solutions, but permanent, investment-backed ones, and private investors have a vital role to play as a key source of capital. Nothing has been ruled out forever, but for now at least, businesses and investors can feel confident about making plans.”

In 2020, 20% of the £8.2bn of private equity and venture capital funds raised by UK-based investors came from private individuals according to the latest data from the British Venture Capital Association (BVCA)***. That equates to around £1.6bn of investment.

Research****conducted earlier this year among Connection Capital’s client base of high net worth private investors indicated that raising CGT would negatively impact investment appetite, as investors would be forced to reassess the risk/reward profile of SME investments.

One in four (25%) of those surveyed said they would reduce their investments into small businesses by half or more, and almost one in five (18%) would invest 25% less.

Although some investments in start-ups and early-stage businesses are eligible for tax breaks under the Enterprise Investment Scheme (EIS), most SMEs are excluded.

Connection Capital’s research also highlighted how crucial capital gains are for investors in the current climate, compared to income-based returns. 71% of respondents said that achieving returns that are capital in nature is important when looking for new alternative asset investment opportunities, whereas income-producing opportunities were cited as important by only 22%.

About Connection Capital
Connection Capital LLP is a Financial Conduct Authority authorised and regulated, specialist syndicator of investment funds from private professional investors into direct private equity, private debt and commercial property deals, as well as alternative asset funds. It currently has some £370 million of funds under management across a diverse portfolio.

Connection Capital provides a specialist managed service to help professional clients build up their own alternative asset portfolios. Private investors self-select which opportunities they want to take a stake in. Opportunities are identified and negotiated by Connection Capital, which also carries out all due diligence and manages the investment from completion through to exit, on its clients’ behalf.

Press enquiries:
Claire Madden
Managing Partner
Connection Capital
020 3696 4010 or 07764 241476

Russell O’Connor
Headlines for Business 07760 282586

****Survey carried out among Connection Capital clients between 14 April and 30 May 2021. 203 out of around 1,200 clients took part. Connection Capital clients’ total estimated net worth is over £11bn.