Five terrible tax breaks are costing taxpayers £4 billion a year

Five poorly-justified tax reliefs, used by just 70,000 individuals, are costing other taxpayers £4 billion a year, according to new HMRC tax reliefs statistics published today (Thursday), and should be in the sights of the Chancellor as he approaches his Budget on 15 March, the Resolution Foundation says.

The latest HMRC data shows that 105 of the country’s non-structural tax reliefs cost £195 billion in the year 2020-21, up £30 billion (18 per cent) on the year before. The biggest single tax break was Private residence relief on Capital Gains Tax, providing £37 billion of relief, followed by net Income Tax relief on pensions, which provided £27 billion of relief.

The Foundation notes that the UK’s myriad of tax reliefs are hugely expensive and yet are rarely assessed for their efficacy or value for money.

It identifies five tax reliefs in particular – Business asset disposal (BAD) relief and Investors’ relief in Capital Gains Tax (CGT), as well as Business relief, Agricultural relief and the Residence nil-rate band in Inheritance Tax – which together cost £4 billion a year.

Despite their huge cost, these five tax breaks are used by just 70,000 individuals, representing 0.1 per cent of the population, who are getting tax breaks worth over £50,000 each, on average.

The Foundation adds that there is little justification for these reliefs. There is no evidence that the CGT reliefs actually encourage entrepreneurship, and indeed the lack of evidence prompted the Government to rightly cut the maximum value of Entrepreneurs’ Relief (now BAD relief) in the 2020 Budget.

The Inheritance Tax reliefs are entirely unjustified as they are used only by very wealthy individuals, who don’t need additional help reducing their tax bills, and risk contributing towards wider public distrust of Inheritance Tax. Even the residence nil-rate band – designed to allow a home to be passed on tax-free – only benefits around 3 per cent of estates given how few would pay any Inheritance Tax anyway.

Adam Corlett, Principal Economist at the Resolution Foundation, said:

“The UK’s myriad of tax reliefs are hugely expensive, and yet are rarely scrutinised for their value for money in the way that public spending is.

“In particular, five terrible tax reliefs for Capital Gains Tax and Inheritance Tax are being used by just 70,000 individuals, who stand to gain around £50,000 each, and are costing other taxpayers around £4 billion a year.

“There are far better ways for the Government to spend £4 billion, and the Chancellor should have these poorly justified tax breaks in his sights as he approaches a tax-reforming Budget in March.”

Notes to Editors

The HMRC tax relief statistics are available here.