Entrepreneurs’ relief should be scrapped as an expensive, ineffective and regressive option, with the £2.7bn saved used by the government towards funding its £20bn NHS pledge, according to claims by the Resolution Foundation.
The think tank says that when first announced in 2008 entrepreneurs’ relief was expected to cost £200m a year. Because of changes to the rules and greater than expected use, actual spending on the relief had ballooned 10 times to over £2bn by 2011-12 and HMRC estimates that last year it cost £2.7bn.
The Foundations says the benefit of entrepreneurs’ relief’s high cost is highly concentrated among a few very wealthy individuals. In 2015-16, 52,000 people claimed the relief, benefitting by an average of £75,000.
Just 6,000 people made claims on gains of over £1m, but this small group (12% of beneficiaries) accounted for 69% of the gains, benefitting by an average £450,000 of tax relief each.
The Foundation says those average gains will have reduced more recently, but only because the top rate of capital gains tax has been cut, while 82% of the beneficiaries are male with a typical age of 57.
The think tank also claims there has been no clear evidence of its effectiveness. Even amongst those entrepreneurs claiming the relief, far more say they were unaware of it either when founding their business or when disposing of it than say it influenced their decisions. There is no evidence that it has led to any substantial increase in genuine entrepreneurship, with the number of self-employed people that have employees falling during the financial crisis and remaining at or below 600,000 since 2010.
Adam Corlett, senior economic analyst at the Resolution Foundation, said: “The UK’s £2.7bn entrepreneurs’ relief is hugely expensive and overwhelmingly benefits a small number of wealthy individuals. There has also been no serious evaluation of the relief, despite it costing £22bn over the past decade.
“As the Treasury wrestles with how to raise revenues to fund the Prime Minister’s pledge of £20bn for the NHS, they should start by scrapping this expensive, regressive and ineffective tax relief.”