UK’s venture capitalists brace for tax rises
Higher UK taxes threaten venture capital
For the UK’s venture capital industry, the looming arrival of a new tax regime is being denounced in life and death terms.
Haakon Overli, co-founder of UK venture investor Dawn Capital, warned the contemplated tax increases “would hit us so hard . . . if suddenly 45 per cent of it goes away our economic model ceases to work”.
The alarm from Overli and his rivals across Britain comes as the Labour party and chancellor Rachel Reeves attempt to pin down their first Budget, due this autumn. The plan is expected to make “big asks” of the wealthy, many of whom are up in arms.
The venture capital industry’s concerns centre on two changes to the tax code: a potential increase in the capital gains tax and the closing of some of the loopholes that set how carried interest — the lucrative performance fees that fund managers receive from asset sales — is taxed.
Even before anything final has been approved, the discontent is palpable.
“If anything makes the UK less attractive for talent — and increasing taxes will do so — the country as a whole will end up losing,” said Taavet Hinrikus, the co-founder of London-listed fintech Wise who now runs European tech investor Plural.
The tax shift will be laid out in the October Budget. Many already see the writing on the wall: Prime Minister Keir Starmer last week gave his clearest indication yet that tax increases were on the horizon.
Reeves has said there was a £22bn “black hole” in the public finances left by the Conservative government that needed mending, with gaps in funding for Britain’s asylum system and railways.
Capital gains and carried interest are taxed in the UK at a rate of 20 per cent and 28 per cent, respectively. That’s much lower than the highest bracket of income tax, which is 45 per cent.
While private equity executives are the first group that clearly would be affected by the rises, venture capitalists would also be forced to pay up.
The industry is arguing that it shouldn’t be treated like its private equity peers, given so many of its wagers don’t turn profitable — let alone into unicorns. It believes taxing the profits on its big wins, as a result, would hamper the industry and future investment in start-ups.