Scrapping IHT Relief For Family Business Could Damage Economy

Scrapping IHT relief on family businesses would appear to be at odds with Labour’s mission to kickstart economy but rumours continue to flow that Rachel Reeves might be thinking about scrapping or restricting business relief.

The Institute of Fiscal Studies (IFS) has said capping inheritance tax relief for family businesses at £500,000 would generate £1.1bn a year for the public purse. Its impact, says accountants James Cowper Kreston who represents ambitious owner-management and family businesses, would be devastating for those businesses and the economy.

And, the firm says, if the government were to go further and remove IHT relief on AIM shares, it would create a fire sale of those shares hurting both the “engines of the UK economy” and investors.

Stephen Barratt, a partner in the Private Client Services team at James Cowper Kreston comments; “The Labour government’s first and foremost mission is to ‘kickstart economic growth’ with good jobs and productivity growth in every part of the country."

“A business is not an asset class like investments but an engine for jobs and economic growth and so should be treated differently from other assets. Whilst scrapping or capping inheritance tax relief on family-owned businesses might generate additional revenue, though a relatively modest amount, it is likely to have a wider economic impact in terms of the business disruption."

“In many cases, the business will be the family’s most valuable asset and will need to be the source of the capital required to pay the tax. If this involves a sale, perhaps at a reduced price due to the circumstances, if indeed there is a market at all, the disruption caused could impact the stability of both the business and the jobs reliant on it. Ultimately it could result in closure."

“As for the suggestion of a proposed cap of £500,000, this looks to be an entirely arbitrary figure and would create an artificial cliff edge. If anything, the wider consequences caused by the disruption of more valuable businesses could be even worse in terms of the number of employees impacted."

“Tax policy must support the aims of government and removing IHT on family businesses would be in direct conflict in its wish to restart economic growth."

“The government may also be tempted to remove the relief on AIM shares, to bring the AIM market in line with the main market. But this would risk a fire sale of shares and great volatility, potentially wiping hundreds of millions of pounds off the value of AIM-listed companies – the very businesses the government needs to achieve its primary mission. It would also hit private investors hard."

“The Chancellor would do well to weigh these matters carefully."