Reeves is being encouraged to target a backbone of the British economy
I think I know what’s going on here. Clearly the eggheads at some of the UK’s more, err, progressive think tanks have been watching too much Succession, the epic TV series in which a highly dysfunctional and incredibly well-dressed dynasty squabbles for control of a global media empire.
How else to explain calls from both the Institute for Fiscal Studies and the Resolution Foundation for changes to business and agricultural relief from inheritance tax. This has been pitched as a way for the Government to raise much-needed funds and close a tax loophole on “unearned” wealth.
It is exactly the kind of wrong-headed suggestion that could have only been dreamed up by academics and wonks who have never worked in an actual business, have a very abstract understanding of how wealth is created and relax at the end of their not very long days in a university department or think tank by watching too many box sets.
Talking to The Telegraph, an economist at the IFS said: “There’s empirical evidence that kids tend to run businesses worse than their parents did. So it is actually better off being passed on [ie sold] from a growth perspective.”
I’ll just let that sink in for a moment.
I have to admit that I genuinely couldn’t believe what I was reading when I came across that quote. My first thought was that I was having a stroke. My second was that the IFS really shouldn’t be letting those with no clue about businesses dream up policies that could have such massive knock-on implications for the private sector.
I enjoyed watching Succession too – but as a work of fiction not as a source of research. I’ve yet to see real world evidence that all second-generation family business owners are Kendalls, Romans and Shivs. The Government’s own prisons minister, James Timpson, who took over as chief executive of his family business from his father John, is a pretty good counter example.
Here’s some genuine empirical evidence: roughly 90pc of all start-ups fail. By the IFS’s logic, presumably this means we shouldn’t bother with entrepreneurship either. Of course, in the real world, that would be a tad self-defeating because the minority of start-ups that do prosper more than make up for the majority that fall by the wayside.
Similarly, even if most family-run businesses don’t navigate the difficulties of intergenerational succession (and I’m far from persuaded this is indeed the case), those that do will provide far greater economic benefit than an extra billion or two in tax.
How can I be so sure? Because the UK is home to 4.8m family-owned businesses, which employ half the private sector workforce, contribute £225bn in tax (more than a quarter of government receipts) and genuinely form the backbone of the economy.
Is our collective understanding of entrepreneurship, risk capital and wealth generation really so far gone that policymakers no longer get this? Does Rachel Reeves really believe she can boost growth while simultaneously penalising and disincentivizing so many SMEs?
As for agricultural property getting caught up in IHT, well. There are broadly two groups of people going into this country’s benighted farming industry at the moment: the children of farmers and former Top Gear presenters. And we surely can’t expect Jeremy Clarkson to grow all our potatoes.
For almost 50 years, successive governments have retained business relief as part of the inheritance tax regime. Was this simply because they were happy with a certain segment of society not paying their way? No, they didn’t touch it because it works. (Treasury officials should take their own Hippocratic Oath: first, do no harm.)
Has anyone at the IFS or Resolution Foundation actually bothered to talk to any family-owned businesses? Business relief isn’t a loophole; on the contrary, it levels the playing field. No other type of business faces an utterly punitive tax bill simply because the ownership changes hands.
The current rules give business owners the confidence to make long-term investments in their companies and the communities which they serve. Indeed, there’s anecdotal evidence that mere speculation about proposed changes has already resulted in a tightening of purse strings.
And no wonder. The lobby group Family Business UK has run the numbers on a hypothetical medium-sized, second-generation family-owned business with 100 employees making profits of £4.5m on turnover of £25m a year. It calculated on the death of the founder, Widget & Sons/Daughters could face a tax bill of between £18m and £20.6m.
“At that point it is likely the business would have to either be sold or bring in outside investment, which would remove the benefits of being family-run,” says FBUK. “They are unlikely to regard the cost of the tax bill as being one the business could simply absorb and carry on as usual.”
You can say that again.
There’s also the fairness of the thing. IHT is supposed to be a tax on unearned wealth. But most members of a family that revolves around a business will tell you it’s not just the nominal owner who makes sacrifices. Often relatives will work for the business at below market rates (or for nothing) in order to plough as much profit back into the business and help it grow.
Since that growth will translate into the value of the company, which the Government would be grabbing if the business relief was scrapped, can underpaid (or unpaid) labour now be claimed back from the Treasury? Of course not. So why would anyone do it?
This pretty basic thought-experiment illustrates how those proposing the tax changes clearly wouldn’t recognise a business even if it slapped them around the face with its P&L, have no real clue how their lab-grown policies might behave in the wild and are wholly unprepared for a plethora of unintended consequences.
To the IFS and Resolution Foundation: you do lots of great work. I love you. But on this one, you are not serious people.