This article is more than 6 months old

This article is more than 6 months old

The chancellor is planning to scrap a £3bn tax relief that mainly benefits the wealthy in a bid to raise cash for an expected increase in public spending in the budget on 11 March.

Rishi Sunak is expected to target entrepreneurs’ relief, a tax break which halves the capital gains tax paid when people sell their businesses. Under current rules, sellers pay only 10% on lifetime gains of up to £10m, comparedwith the 20% capital gains tax paid by higher-rate taxpayers.

Scrapping the relief would give Sunak extra room for manoeuvre in a budget that is expected to include expensive pledges such as an increase in spending on railways and electric car chargers.

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.

The Institute for Fiscal Studies thinktank has previously strongly criticised the relief, saying it was not well targeted and that it caused distortions in the tax system.

The IFS said last week that scrapping it would make the tax system “more equitable and more efficient”. It said 5,000 individuals made an average tax saving of £350,000 in 2017–18 tax year – meaning they gained three-quarters of the £2.3bn cost of the relief. The Resolution Foundation last month said £3bn could be raised by scrapping it.

“There are plenty of tax rises which would both raise revenue from better off individuals and improve the coherence of the tax system,” said Paul Johnson, director at the IFS. “Top of the list should be the abolition of the misleadingly named entrepreneurs’ relief.”

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However, the plans to scrap it have alarmed some business groups. Mike Cherry, the national chair of the Federation of Small Businesses, said scrapping the relief would make “everyday entrepreneurs” poorer.

“Only around 10% of people who claim this relief are selling businesses worth more than £1m. The vast majority of those who benefit from this incentive – 38,000 each year – are everyday entrepreneurs.”

The Treasury declined to comment.