Inheritance tax raid ‘will hit 140,000 family businesses’

Ms Reeves holds her hand to her forehead
Rachel Reeves stopped short of scrapping business relief altogether - but her changes still worry business leaders - Elliott Franks

Rachel Reeves’s inheritance tax raid on businesses will hit as many as 140,000 family firms, new analysis suggests.

The Chancellor used the Budget to drastically cut the relief that entrepreneurs can claim when passing their company on to their children.

Industry leaders warned the move could prompt a wave of closures and job losses as employers shut up shop to avoid large tax bills.

Under the previous rules, business owners could pass their firm and its assets on to their children without having to pay any inheritance tax.

But at the Budget Ms Reeves massively scaled back business property relief and imposed a new £1 million cap on the tax-free amount.

Above that cap, relief will be applied at just 50 per cent, meaning those inheriting firms face a 40 per cent tax bill on half of everything above the £1 million mark.

There are an estimated 140,000 family-owned businesses with an annual turnover of more than £1 million, suggesting they may be affected by the change.

Sir James Wates, the chairman of Family Business UK, which produced the figure, accused Ms Reeves of “economic illiteracy” over the change.

He said that entrepreneurs felt “incredibly let down” by the Budget and that the cut to business property relief was “a recipe for disaster”.

“For me it says nothing about growth. In the real world businesses will shrink,” he warned.

“Business owners will say what is the point of taking all the risk we take, putting our houses on the line, if at the end of the day we can’t pass on the benefits of our labour.

“We’re talking about multi-generational family businesses. It’s potentially devastating.”

‘Incentive to wind down’

Sir James, a former chairman of Wates Group builders, warned many firms would respond by cutting investment and reducing staffing levels.

He said the move meant there was now an incentive for entrepreneurs to wind down the size and value of their companies rather than pass them on.

Analysis carried out by CBI Economics before the election suggested the change could cost the economy billions and cut employment levels.

The business group’s report found that completely scrapping tax relief for passing on businesses would have led to £29 billion of damage and 391,000 job losses.

It was based on a survey of how more than 800 firms would respond to the complete removal of business property and gift holdover reliefs.

Whilst the impact of Ms Reeves’ changes will be less severe, industry leaders warned the £1 million cap will only cover the smallest of companies.

The Treasury has estimated that the change to business property relief will only impact around 1,450 claims each year.

Officials pointed out that under the old rules the top 4 per cent of claims, representing the biggest firms, accounted for £553 million a year in saved tax.

That meant that a tiny minority of the largest companies were claiming more than half of the total amount of relief awarded.

A Treasury spokesman added that the CBI Economics figurers were “based on a survey undertaken before the Budget, and on the basis that BPR would be scrapped”.

“That is not what we have done,” he added.