Concerns are rising within the UK business community as Labour considers changes to inheritance tax relief.
- Over 3,000 family-run enterprises may face higher inheritance tax bills annually if business relief is scrapped.
- The Institute for Fiscal Studies (IFS) indicates that current business relief on inheritance tax saves companies £1.4bn each year.
- Family Business UK (FBUK) calls for assurances from the Labour Party to prevent potential business closures and job losses.
- Labour’s stance on inheritance tax reform remains unclear, causing anxiety among small businesses as the election nears.
Family Business UK (FBUK) has raised alarm over Labour’s potential overhaul of inheritance tax relief, which may result in significantly higher tax bills for more than 3,000 family-run enterprises each year. This move threatens to lead to company closures and widespread job losses.
According to the Institute for Fiscal Studies (IFS), current business relief on inheritance tax saves companies £1.4bn annually. This relief is vital for family-run businesses to maintain stability and growth, as it allows them to reinvest capital into operations rather than reserving funds for tax liabilities.
Neil Davy, chief executive of FBUK, has urged Chancellor Rachel Reeves and Business Secretary Jonathan Reynolds to provide assurances that this vital relief will not be targeted for revenue generation. He emphasised the importance of this legislation in supporting family businesses, highlighting past reassurances from previous government ministers.
With the election approaching, the lack of clarity from Labour on their inheritance tax policy is causing anxiety among small business owners. Many fear that an increase in inheritance tax could be a mechanism to fund public services, making future financial planning uncertain.
Currently, inheritance tax is levied at 40% on estates above £325,000 (rising to £500,000 if a main residence is passed to children). Business owners can claim up to 100% relief on business assets, a measure utilised by 3,380 businesses in the 2020-21 tax year, according to FBUK. Given that family businesses account for 90% of all privately-owned firms in the UK, employing around 14 million people, the implications of removing this relief are profound.
Recent reports suggest Labour plans to raise £10bn by increasing capital gains tax and tightening inheritance tax reliefs while pledging not to raise income tax, National Insurance, VAT, and corporation tax. The IFS recommends capping or removing various tax reliefs, including those for agricultural land, businesses, and pensions.
IFS deputy director Helen Miller stated, “One measure that should be taken, regardless of the desired revenue, is to remove or cap various reliefs.” Conversely, Neil Davy warned that eliminating business relief would hinder economic growth by forcing companies to reserve funds for future tax liabilities or liquidate assets. He asserted, “This [£1.4bn in tax relief] isn’t money sitting in personal bank accounts. It’s capital within the business, used for investment, growth, employment, and ensuring long-term stability.”
The impact of removing inheritance tax relief on private company shareholdings has been described as “the nuclear option” by Ollie Saiman, co-founder of wealth manager Six Degrees, due to its severe implications for small businesses. A Treasury spokesman highlighted the importance of economic stability and its role in keeping taxes, inflation, and mortgages low, underscoring the broader economic context of the debate.
The uncertainty surrounding Labour’s inheritance tax plans continues to cause significant concern within the family business sector, with potential far-reaching economic implications.
