Yesterday, Chancellor Rachel Reeves announced her government’s long awaited budget. In the leadup, the Prime Minister often used the phrase “tough decisions” to describe the measures, which has, in effect, made the entire UK economy brace for a tough budget.
While growth figures have been somewhat positive recently, with the IMF boosting growth projections from 0.4% to 1.1%, the state of UK public finances has prompted the government to pursue significant tax rises, totalling £40 billion, to address a ‘black hole’ it inherited from the previous government. Such decisions have a vast impact on our VC Ecosystem. Below, we outline how this government’s first budget will affect you, as a general partner (GP), limited partner (LP), founder or angel investor.
Written by: Tanay Sonawane, Andrew Mazalkov, Marcus McGrigor and Shirley Mabasa
GENERAL PARTNERS
The UK’s Autumn 2024 budget unveils several policies poised to impact GPs across a spectrum of fund types and sizes. Among the most consequential changes are increases to Capital Gains Tax (CGT) rates. Effective from this month, rates of CGT will rise to 18% and 24% respectively, with Business Asset Disposal Relief (BADR) and Investors’ Relief (IR) increasing to 14% in April 2025 and subsequently to 18% in April 2026. These increases, while on the lower- end of expectations leading up to the announcement, will still mean GPs need to plan ahead of portfolio exits to manage losses from increased taxation.
An additional concern is the taxation of carried interest, a vital income source and incentive for many GPs to build strong portfolios. Traditionally taxed under CGT, carried interest will see its rate increase to 32% from April 2025 and will transition to the Income Tax framework by April 2026. This shift is thought to impose a heavy tax burden on GPs, raising the overall tax paid on profits distributed as carried interest. GPs may need to reevaluate their current compensation structures around this in order to mitigate heavy tax burdens. However, a carried interest consultation is underway, with potential relief for emerging managers in the conversation. As such, GPs should plan carefully for both scenarios and be aware that their compensation structures should be reviewed regularly for these changes.
Moreover, the abolition of the non-domicile tax status represents a challenge for GP’s when it comes to pitching to overseas LPs. It may become more challenging to convince LPs who have lost their non-dom status and may be less comfortable investing in UK-centric funds.
The impact of increased employer National Insurance Contributions (NIC) adds another layer of cost for startups and smaller companies. An increase of 1.2 percentage points, combined with a reduction in the secondary threshold to £5,000, raises the cost of hiring for early-stage companies that operate on limited budgets. While there is some protection for the very smallest of firms, VCs need to consider not only their own hiring situations, but also that of slightly more mature investments, who may be impacted in trying to hire the best possible talent.
New tax rules surrounding the liquidation of Limited Liability Partnerships (LLPs) also introduce constraints that may reduce flexibility for GPs considering exit strategies. This policy aims to tighten tax regulations to curb tax avoidance, which could lead to less efficient or more costly exits for LLP-structured funds, affecting portfolio liquidity and potentially discouraging certain structuring choices among funds. Furthermore, HMRC’s investment in expanding compliance and debt management initiatives signifies a broader shift towards rigorous tax enforcement. With an emphasis on targeting non-compliance and scrutinising complex financial arrangements, VC funds and founders may face heightened administrative burdens and greater oversight, prompting a need for more stringent internal compliance practices.
In contrast, the budget includes new incentives for climate-related investments and green technology. With the government’s focus on sustainability and decarbonization, specific tax reliefs have been earmarked for green tech and environmental sustainability initiatives. These incentives create an attractive pathway for GPs interested in cleantech or greentech focussed startups and may encourage greater capital flow into businesses aligned with government sustainability goals.
Overall, most GP’s can breathe a sigh of relief. The budget does give rise to challenges for the administration of funds and the attraction of LP funding, but overall, with good planning and effective strategy, GPs should be able to navigate this new fiscal regime effectively. The UK is still a healthy and competitive environment to start and invest in businesses, on par with G7 and further afield.
LIMITED PARTNERS
The budget raises the lower CGT rate from 10% to 18% and the higher rate from 20% to 24%, effective April 2025, with further increases planned for April 2026. As a result, LPs, particularly those investing in venture capital and private equity, may experience reduced after-tax returns on their capital gains. The phased increase affects long-term planning and could decrease overall net distributions to LPs, especially if they rely heavily on capital appreciation.
Inheritance tax reliefs for agricultural and business property will be limited to £1 million, with assets above this threshold subject to a 50% relief rather than total exemption. Unspent pension pots will also be subject to taxation from April 2027. The government’s objective is to make the inheritance tax system fairer by restricting some of the current benefits to individuals with wealthy estates. For family offices and high-net-worth LPs using private equity investments to preserve wealth across generations, this change limits tax-advantaged wealth transfer and reduces flexibility for HNWI in estate planning. An expected 8% of estates are likely to be affected by this change every year.
The budget maintains the £1 million lifetime limit for BADR. This relief can offer a favourable capital gains rate on qualifying business sales, which could benefit LPs if portfolio companies are successfully exited. Although BADR rates are scheduled to rise in the coming years, the continuity provides LPs with a predictable tax environment for planning exits in the near term. The BADR and IR rates are expected to rise to 14% from 6 April 2025 and will match the primary lower rate of 18% from 6 April 2026.
Some of the planned changes could be beneficial for LPs. For example, retail, hospitality, and leisure (RHL) businesses with eligible properties (those valued under £500,000) will see their business rates relief become permanent. This move supports LPs invested in high-street retail or hospitality-focused funds by potentially lowering tenant occupancy costs and improving income stability, which may lead to stronger returns from these properties. RHL properties will be eligible to receive support up to a cash cap of £110,000 per business.
Continued tax allowances for zero-emission vehicles and electric vehicle infrastructure align with ESG priorities and may benefit LPs focused on sustainable investments. This extension provides additional incentives for green-sector companies, improving the investment appeal of portfolios focused on carbon reduction and net-zero initiatives.
To benefit from these more favourable changes, LPs may consider prioritising investment strategies that balance tax efficiency with the potential for inflation-hedged returns, especially in sectors less susceptible to new tax burdens.
FOUNDERS
Yesterday’s Autumn Budget has raised concerns for UK founders and investors, as Chancellor Rachel Reeves announced increases to the Capital Gains Tax (CGT) rates. The changes will see the lower CGT rate rise from 10% to 18% and the higher rate from 20% to 24%. Reeves justified the hikes, noting, “The UK will still have the lowest capital gains tax rate of any European G7 economy,” she told Parliament.
The increases are less severe than was initially feared (rumoured to hit 39%), but have still caused discomfort among founders who see the tax rises as a potential threat to their exit values. A recent survey, taken before the budget announcement, found that 72% of founders had “already investigated moving themselves or their business abroad.” Given higher CGT, entrepreneurs may be more inclined to launch or relocate businesses in more tax-favourable locations, diverting potential growth and investment away from the UK. Last week, some 500 fintech entrepreneurs warned that raising CGT could “upset structures that have proved valuable” for encouraging business investment, reducing the financial incentives to launch and scale companies domestically.
Beyond CGT, founders will face a 1.2% rise in Employer National Insurance Contributions (NICs) to 15%. Although a rise in the employment allowance offers some relief to smaller firms, this NIC increase will likely raise hiring costs across the board, tightening already-stretched budgets for companies looking to grow.
On a more positive note, Reeves did opt to maintain the £1m lifetime limit for Business Asset Disposal Relief (BADR), also known as ‘Entrepreneurs’ Relief’ (ER), for now. While this could encourage some entrepreneurs to continue reinvesting in their UK-based businesses initially, many remain unconvinced. With staggered increases in ER over time - up to 14% in 2025, and 18% in 26/27 - founders are left weighing questions like, “Is it worth starting or growing my business here?” and considering tax-friendlier alternatives such as Portugal, Cyprus, or Dubai. For some, the UK’s competitive advantage may be eroding, as technology has made it increasingly feasible to operate remotely and establish physical touchpoints later, if needed.
This budget follows a series of policy decisions that have stirred tension within the UK’s startup ecosystem. These include what Keir Starmer’s party described as a mistaken tax levy on startups over the summer, a cap on skilled tech immigrant visas, and a significant cut to a £3.1Bn AI funding initiative. Together, these moves have raised concerns that the UK is becoming less hospitable for emerging businesses.
BrewDog Co-founder James Watt voiced his frustration on LinkedIn ahead of the announcement, calling the CGT hike a move that would “destroy entrepreneurial spirit in the UK and, in turn, severely damage our economy.” Watt emphasised that Britain’s “brightest and best entrepreneurs… will simply leave the UK to build businesses and create jobs elsewhere,” warning that this talent flight could hinder long-term growth.
While the budget’s CGT changes may not be as severe as some feared, the policy still represents a shift that could prompt founders and investors to seek opportunities outside the UK. Many stakeholders are calling for a re-evaluation of these policies, fearing they may reduce the UK’s attractiveness as a hub for startups and innovative growth.
ANGELS
The Budget introduces several changes that will significantly impact angel investors - some challenging, but with interesting opportunities on the horizon too.
The headline change is a substantial increase in Capital Gains Tax rates. The lower rate will rise from 10% to 18%, and the higher rate from 20% to 24% from October 30th 2024. This represents the biggest shake-up to CGT in recent years and will affect how angels approach their exit strategies.
For those utilising Business Asset Disposal Relief (formerly Entrepreneurs' Relief), there's a graduated increase coming: the rate will rise to 14% from April 2025, then to 18% from April 2026. The government has stated this phased approach is designed to give business owners time to adjust their planning.
However, it's not all about tax increases. The Budget introduces some interesting opportunities for angels looking at specific sectors: a new Life Sciences Innovative Manufacturing Fund worth £520 million is being established. The creative industries will receive £15 billion in tax relief support over the next 5 years. There's also significant investment in clean energy and tech, with Great British Energy being established with £125 million in initial funding.
Perhaps most significant for the early-stage investment ecosystem: the government has committed to extending both the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes until 2035. This provides much-needed long-term certainty for angels planning their investment strategies.
One subtle, but important change, is that Investors' Relief will see its lifetime limit reduced to £1 million for disposals from October 30th 2024, matching the limit for Business Asset Disposal Relief.
For those investing in property alongside their angel activities, it's worth noting the Higher Rate for Additional Dwellings in Stamp Duty is increasing from 3% to 5%.
Looking ahead, the government's commitment to fostering innovation is clear, with £20.4 billion allocated to R&D investment in 2025-26. This could create more opportunities in the deep tech and science-based startup space that many angels are increasingly exploring.
Overall, the message seems clear: while the tax environment is becoming more challenging, the government is trying to balance this with targeted support for key growth sectors. For angels, this might mean being more selective about investment sectors and paying closer attention to tax planning - but the fundamentals of backing promising early-stage businesses remain supported by policy.
The UK’s August 2024 budget marks a significant shift in fiscal policy, driven by the need to stabilise public finances amid challenging economic conditions. For the VC ecosystem, these new measures bring both obstacles and opportunities, demanding strategic foresight from all players—general partners, limited partners, founders, and angel investors.
GP’s face rising Capital Gains Tax rates and an impending shift in carried interest taxation, urging them to re-evaluate compensation structures and manage portfolio exits with heightened precision.
LP’s, especially high-net-worth individuals and family offices, will need to navigate changes to inheritance tax and plan around increasing rates of capital gains tax, while also leveraging continued incentives for sustainable investments.
Founders, who drive innovation within the ecosystem, may feel the sting of higher CGT and NIC rates, which could challenge the UK’s appeal as a startup hub. However, with the retention of the Business Asset Disposal Relief limit and new sectoral support, opportunities remain for those who align with the government’s targeted growth areas. Angel investors, facing similar tax pressures, are likely to benefit from the extended certainty of the EIS and VCT schemes until 2035, as well as new funds earmarked for life sciences, clean energy, and creative industries.
Although this budget may be disappointing and difficult for many, our analysis suggests it could have been worse. Whilst higher taxes will squeeze everyone involved in VC, the primary advantage here is the stability it provides, giving clarity on the government’s fiscal direction for the coming years. This is a chance to plan and strategise for future success, and it’s essential that everyone in the ecosystem seizes this opportunity to the best of their ability. We firmly believe that the UK’s startup ecosystem is resilient, creative, and strong enough not only to withstand these challenges but to emerge even stronger.
For more insights from the London Venture Capital Network Research and Publications team, follow us across social media platforms.
Comments