Entrepreneurs’ relief, a tax break which mostly benefits wealthy business owners, will be cut by 90% after the chancellor stopped short of scrapping the controversial policy.
Rishi Sunak significantly scaled back the relief, which halves the capital gains tax paid when people sell their businesses, with immediate effect.
Under the revamp, business sellers will pay 10% on lifetime gains of up to £1m, compared with the previous upper limit of £10m. Above £1m, business owners will be charged standard capital gains tax rates, which is 20% for higher-rate taxpayers.
The Treasury calculates that the change will raise £6.3bn over the next five years.
Sunak said he had made the decision after a review, and labelled the relief “expensive” and “ineffective”, costing the Treasury over £2bn per year.
The tax break had previously been heavily criticised by economic thinktanks including the Institute for Fiscal Studies and the Resolution Foundation, who said it was not well targeted and caused distortions in the tax system.
The relief is aimed at incentivising people to create new businesses. It was introduced by Gordon Brown’s Labour government in 2008 and was expanded by the Conservative government after 2010.
However, Sunak said fewer than one in 10 claimants described the relief as an inducement to set up their business, and said almost three-quarters of the cost went to 5,000 people. “Just because it’s called entrepreneurs’ relief, doesn’t mean that it’s entrepreneurs that mainly benefit,” the chancellor said.
He said 80% of small business owners would be unaffected by the change.
The move was praised by Mike Cherry, the chairman of the Federation of Small Businesses as a “sensible compromise”.
Cutting the lifetime limit will enable startups to continue to attract talent, but reduce the incentive for some foreign-born founders to base their companies in Britain, according to Philip Salter, founder of The Entrepreneurs Network.
“Entrepreneurs’ relief is widely understood and cited as part of a package of incentives that helped them decide to start their business in the UK, or move it here,” Salter said.
The chancellor said the money raised by the tax change would be used towards other measures to help businesses, by increasing the tax relief available for businesses investing in research and development, or buildings and structures.
The employment allowance, which small businesses can apply for and put towards employer national insurance contributions and first introduced by George Osborne in 2014, will be increased by a third to £4,000.
The increase was welcomed by the Chartered Institute of Personnel and Development, the trade body for human resources staff, which said small firms and charities would benefit, as they had seen higher payroll costs due to the rise in the national minimum wage.
