The UK government has introduced a new inheritance tax policy impacting family businesses. This change involves reducing Business Property Relief to 50%, creating a 20% effective tax on certain assets. Consequently, affected families may need to revise their business succession plans.
Experts estimate that these changes will generate £500 million annually. Family-run companies over £1 million in value face major tax obligations. These businesses must adjust their financial strategies, prompting debate among business leaders about the future of family ownership.
New Tax Policy for Family Businesses
Family businesses in the UK will encounter a new financial challenge due to changes in inheritance tax relief. The Business Property Relief (BPR) will be halved to 50%, which will result in an effective 20% tax on business assets transferred to heirs. This policy is expected to generate £500 million annually by 2027. Companies valued over £1 million will lose full relief, impacting their succession planning.
Reactions from Business Leaders
There is significant criticism from the business community regarding this tax change. Neil Davy, CEO of Family Business UK, described it as a ‘betrayal’ of hard-working family business owners, highlighting how BPR enabled these businesses to compete with larger corporate models. Steve Rigby, co-CEO of Rigby Group, also criticised the move, expressing fears that heirs might have to sell businesses to settle tax liabilities.
Potential Impact on Investors and Shareholders
Investors in private companies will also be affected by the reduction in tax relief. Experts like Rachel Nutt from MHA warn that families holding private company shares could face substantial tax bills. “For a £30 million business, this could mean a £5.8 million inheritance tax hit,” said Nutt, pointing to a significant financial burden that could force difficult decisions on families.
Government’s Position on the Tax Adjustment
Chancellor Rachel Reeves defended the tax relief reduction, stating that it would affect only a small percentage of estates. Her argument is that the reform is necessary for economic balance, although it leaves many family businesses to reconsider their tax and succession strategies.
Concerns Over Family Business Viability
The change raises questions about the future viability and competitiveness of family-run enterprises. Business Property Relief has historically supported these businesses, allowing them to pass ownership through generations without unsustainable tax burdens. Losing full relief might result in some businesses being sold off, disrupting family legacies.
Active Tax Planning as a Necessary Strategy
In response to the developments, the Office for Budget Responsibility predicts increased activity in tax planning by affected families. The loss of tax revenue from families seeking to optimise their inheritance strategies is estimated to range from £200 million to £300 million annually.
Impact on Smaller Firms
While businesses valued above £1 million face significant changes, smaller firms may retain their reliefs under specific provisions. However, the broad impact of this policy could still have a ripple effect throughout the industry, encouraging smaller businesses to refocus their future planning.
Implications for Estate Planning
Families must now reconsider their estate planning to adapt to the new tax environment. Developing strategies that mitigate the increased tax burden will become essential for maintaining business continuity. This means engaging with tax advisors to explore available options and safeguard family assets.
Long-Term Consequences and Outlook
The long-term effects of these tax changes may vary widely among businesses. Companies that can adapt their estate planning and succession strategies might endure, whereas others may face significant operational challenges. The full impact on the British economy remains to be seen, making it a critical issue for ongoing observation.
The revised inheritance tax policy poses new challenges for UK family businesses. As companies adapt their financial strategies, the impact on long-term viability remains uncertain. Continued assessment will be essential.
