CGT rate hike to curb HNWI investment appetite - survey

Greg Gille
02 June 2021

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More than two in five (42%) high-net-worth private investors polled by Connection Capital have said they would invest less in unquoted SMEs if CGT is increased to the same level as income tax.

The survey found that one in four private investors (25%) would reduce their investments into SMEs by 50% or more, while almost one in five (18%) would invest 25% less.

Connection Capital polled 1,000 clients over a two-week period, with detailed answers obtained from more than 200 clients. The average net worth of a Connection Capital client is £5m, the firm said.

More than seven in 10 (71%) respondents said that achieving capital returns is an important characteristic when looking for new alternative asset investment opportunities, against 22% who said the same for opportunities that produce income.

Pointing out the risk of stifling the UK's economic recovery post-Covid, Connection Capital quoted figures from the British Venture Capital Association (BVCA) showing that 27% of the £5.4bn of private equity and venture capital funds raised in the UK in 2019 came from private individuals - equating to around £1.5bn of investment.

A rise in CGT rates was widely expected to be announced back in the March budget, but that did not come to pass. Nevertheless, Connection Capital managing partner Claire Madden said an upcoming hike remains a strong possibility in the eye of many private investors.

"The Chancellor may have kicked the ball into the long grass for now, but there's no guarantee that he won't pick it up again," she said. "Raising CGT is seen as a soft target, but hitting business investment would be an own goal. There are some serious unintended consequences that need thinking through."

While a rate increase could spell trouble for UK SMEs if implemented, the threat of it has so far boosted buyout dealflow in recent months, especially at the lower end of the market. The 2021 UK budget eventually spared investors and business owners, but the market consensus is that the very rumours of a CGT rate change likely played a significant role in the recovery of buyout dealflow in late Q4 and Q1, as reported by Unquote.

The UK was home to 104 buyouts (valued at a collective estimate of €16.2bn) in the first quarter of 2021, according to Unquote Data. The volume figure in particular is by far the highest ever recorded by Unquote in a single quarter - by comparison, between 50-60 deals were announced in each of the first quarters of 2020, 2019 and 2018.