Tax Changes Threaten Financial Stability of Family Businesses in the UK

A significant policy shift in the UK regarding inheritance tax is poised to impact the financial viability of many family-owned businesses. Previously exempt from taxation when passed to the next generation, business assets will now incur an effective 20% tax. This change is part of an initiative aimed at generating £500 million annually by 2027 and will end full inheritance tax relief for businesses valued over £1 million, with some exceptions for smaller enterprises.

The government’s spending watchdog, the Office for Budget Responsibility (OBR), has indicated that the new rules could encourage affected families to engage in active tax planning, potentially resulting in a loss of tax revenue estimated between £200 million to £300 million each year.

Family business advocates are voicing strong opposition to the changes. Neil Davy, CEO of Family Business UK, characterized the move as a “betrayal of Britain’s hard-working family business owners.” He emphasized that Business Property Relief (BPR) was vital for family-run companies to compete against corporate models, such as private equity, which do not face the same tax pressures.

The backlash continues with Steve Rigby, co-CEO of Rigby Group, labeling the tax reform as “poorly conceived.” He expressed concern that family members may be compelled to sell their businesses to settle tax obligations, particularly if they require cash through dividends, which are taxed at an effective rate of 38%.

The changes to inheritance tax relief will also affect investors in private companies, who will now see their relief capped at 50%. Rachel Nutt, a partner at MHA, cautioned that families holding private company shares need to reassess their estate planning strategies due to the potential for substantial tax bills. “For a £30 million business, this could mean a £5.8 million inheritance tax hit,” she noted, highlighting the financial burden that could be imposed on family firms.

Chancellor Rachel Reeves defended the policy change, asserting that only 0.3% of estates would be impacted. However, the revisions raise critical questions for family business owners, many of whom may need to rethink their succession plans and tax strategies to ensure the continuity of their businesses across generations.

As the new tax regulations take effect, family-owned enterprises are bracing for the potential fallout, facing the dual challenges of navigating financial liabilities and maintaining their legacies in an increasingly complex tax landscape.