For decades, business property relief has been the mechanism that allowed family businesses to pass from one generation to the next without a crippling tax bill. From April, that protection is being substantially reduced, and for the owners of mid-sized family firms, the consequences could be severe.
Under the current system, qualifying business assets attract 100 per cent relief from inheritance tax, meaning the full value of a business can be inherited without any IHT liability. From 6 April, that full relief will be capped at £1 million of combined business property relief and agricultural property relief per estate. Anything above that threshold will qualify for only 50 per cent relief, leaving the excess exposed to an effective tax rate of 20 per cent.
For a family business worth, say, £2 million, the arithmetic is stark. The first £1 million passes tax-free. The remaining £1 million attracts 50 per cent relief, reducing the taxable amount to £500,000. At the 40 per cent IHT rate, the family faces a bill of £200,000. For a £3 million business, the bill rises to £400,000. These are not theoretical numbers; they represent cash that must be found from somewhere, and for many family firms the options are limited to borrowing, selling assets or, in the worst case, selling the business itself.
The government has offered one concession: the tax can be paid in instalments over ten years, interest-free. But spreading the cost does not eliminate it, and for a business that needs every pound of working capital to operate, even staged payments represent a drain on resources.
The numbers behind the family business sector explain why the reforms have provoked such fierce opposition. There are 5.1 million family businesses in the UK, employing 15.8 million people and generating £2.8 trillion in turnover. They are not a niche; they are the backbone of the economy. More than a quarter of firms surveyed now believe they may not remain family-owned within the next decade, with the tax changes cited as a key factor.
Farmers have been particularly vocal, launching a High Court challenge and arguing that land values push many modest-sized farms well above the £1 million threshold despite generating relatively low incomes. But the issue extends far beyond agriculture. Manufacturing firms, construction companies, professional practices and retail businesses with premises and stock can easily exceed the cap without their owners considering themselves wealthy.
The reforms are expected to raise around £500 million a year by 2027, a figure that the Treasury considers significant but which critics argue is modest compared to the economic damage of forcing family businesses into distressed sales or early closures.
For any family business owner who has not yet taken professional advice on succession planning, the time to act is now. Trusts, lifetime gifts, insurance arrangements and restructuring options all take time to implement and must be in place well before they are needed. Waiting until a health crisis forces the conversation is a recipe for the worst possible outcome.
