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Ditching inheritance tax relief for UK family-owned businesses would hit Labour’s mission to boost private sector investment, a group representing the sector has warned as it seeks to head off the risk of the regime being abolished.
Business relief, which has existed for decades in various forms, allows businesses to be passed from one generation to the next with either a full or 50 per cent reduction in inheritance tax, which is usually charged at a rate of 40 per cent.
Family Business UK said in a paper on Thursday that scrapping or cutting the exemption would weaken the incentive for owners to invest and force many families inheriting a business to sell shares to cover their inheritance tax bill.
Businesses consulted by the group had warned that “any policy decision that restricts the reliefs would likely result in family businesses being broken up, offshoring, or — in the worst-case scenario — closing”, it said.
Sir Keir Starmer’s government has made increasing private sector investment a strategic priority as it seeks to jump-start economic growth.
But Steve Rigby, a director of Family Business UK, told the Financial Times that the timing of the group’s intervention was motivated partly by the possibility the government may seek to raise more money through taxation.
“There are only about 30 or so taxes worth £1bn or more, one of which is business relief,” said Rigby, who is also co-chief executive of Rigby Group, one of the UK’s biggest family-run companies with annual revenue of almost £4bn.
“If you’re not coming from a business environment or haven’t worked strongly in government with family businesses, it could be easy just to take a pen through [it] . . . I think that would be a very significant mistake,” he added.
The Institute for Fiscal Studies previously calculated that capping the relief at £500,000 would raise £1.1bn a year for the public purse. Abolishing it would generate £1.4bn, assuming businesses did not change their behaviour, the think-tank said.
While business relief is used by many family-owned firms, it added, about 80 per cent of the relief benefits owners of shares in quoted companies, particularly those on London’s junior Aim market.
The IFS said last year that business relief was “costly and inequitable” and distorted economic decisions.
On average 3,200 estates benefit from business relief each year, avoiding an average tax bill of £770,000 in each case, according to FBUK analysis of data from HM Revenue & Customs.
Labour has previously said its spending plans could be fully funded by the limited number of tax rises in its general election manifesto. These include imposing VAT on private school fees, increasing tax on private equity bosses and narrowing the “non-dom” regime for wealthy foreigners.
But ministers have been laying the ground for a tough autumn Budget, claiming they have inherited a toxic fiscal legacy from the Conservatives.
While family-run businesses tend to be lower profile than publicly owned groups or those owned by private equity, FBUK estimates they account for 13.9mn jobs — about half of all UK private sector employment.
Rigby said the current relief regime, which also enables business assets to be gifted free of capital gains tax “promotes serial entrepreneurship and rewards the risk takers in our economy, by providing much needed motivation to invest”.
“This approach is hard to grow and quick to lose,” he added.
Rigby said he thought it would be reasonable for the government to introduce a clawback mechanism, similar to the US and Germany, if people who benefit from the relief do not continue to hold the business for a minimum period.
The Treasury said: “We have set out the need for economic stability and we have begun fixing the foundations so we can grow our economy and keep taxes, inflation and mortgages as low as possible.”
