UK family business sustainability underwritten by inheritance tax

Sustainability, growth and jobs are at stake when the issue of UK family businesses and inheritance tax flares up, say sector experts.

Tax Justice UK’s new research released this week said the British government was handing out up to £666 million ($849 million) a year in inheritance tax reliefs on land and business property to families who were already well off.

“Politicians are giving some of the wealthiest families in the UK generous tax breaks, money that cuts into the cash that could be spent on doctors or teachers,” the campaigning and advocacy organisation said.​

“Inheritance tax is unpopular, but most people don’t own enough to pay it since every couple can pass on up to £950,000 of their wealth tax free.”

However, Business Property Relief (BPR) was an “absolutely crucial” relief for family businesses, according to the Institute for Family Business. Ultimately, without BPR, the death of a major shareholder could lead to break up of otherwise successful businesses.

Fiona Graham (pictured right), Director of External Affairs and Policy at the institute, said while Inheritance Tax fell under the personal taxation regime, “the reality is that the cost of paying the liability would fall on the business, as individual shareholders don’t have sufficient assets outside the business to meet the tax charge. Businesses would either need to sell, break up the business or limit investment to be able to pay a hefty tax charge.

Graham said BPR was also an example of how tax reliefs could support business growth, taking away a disincentive to grow.

“Some 85,000 family SMEs are expected to transfer ownership of their business to a new generation each year,” she said.

“Around 84% of family SMEs are estimated to be first generation businesses. BPR supports these families in continuing to invest and grow under stable ownership, and successfully transitioning to the next generation.

“Supporting the successful transfer of family businesses, and taking away the disincentive to grow, benefits the UK economy as a whole. Figures released last week show that 13.4 million people in the UK now work in family firms, and those businesses contribute £182 billion in taxes—that’s more than the NHS budget for 2017-18.”

Hannah Harris (pictured left), UK Family Business Leader at PwC, said family businesses in the UK had a “significant and positive impact” on the UK economy, focusing on long term and sustainable business models.

The ability to take a long term view was underpinned by a patient capital approach, a focus on a strong balance sheet and a stable tax environment.

“Family businesses in the UK employ more than 12 million people, contributing to the exchequers tax revenues and, crucially, to the wellbeing of their communities,” Harris said.

“Historically, complex and expensive tax on transitioning shares in a private or family business has presented a challenge in ensuring continuity for businesses and therefore continued employment and a tax revenue stream.”