In a move stirring significant concern among UK family-run businesses, Chancellor Rachel Reeves has unveiled plans to reform inheritance tax (IHT) policies, specifically targeting Business Property Relief (BPR) and Agricultural Property Relief (APR). Set to take effect in April 2026, these changes aim to cap tax relief on inherited business and agricultural assets at £1 million.
Assets exceeding this threshold would incur a 20% tax, a shift from the current 100% relief. While the government anticipates an annual revenue increase of £500 million by 2030, industry experts and trade associations warn of dire economic repercussions, including substantial job losses and decreased investment across vital sectors.
Understanding the Proposed Inheritance Tax Reforms
The Labour government's proposed IHT reforms focus on limiting the scope of BPR and APR. Currently, these reliefs allow family-owned businesses and farms to transfer ownership without incurring significant tax liabilities, facilitating continuity across generations.
The new policy introduces a £1 million cap on these reliefs, with any value above this subject to a 20% tax. This change is poised to affect thousands of family enterprises, potentially forcing sales or closures to meet tax obligations.
Economic Implications: Job Losses and Investment Declines
Independent analysis by CBI Economics, commissioned by Family Business UK (FBUK), projects that the IHT reforms could lead to over 125,000 job losses and a £9.4 billion reduction in economic activity between 2026 and 2029.
The study also forecasts a £1.25 billion net fiscal loss to the Treasury, challenging the government's revenue expectations. The anticipated economic downturn stems from reduced investments and operational cutbacks as businesses brace for the increased tax burden.
Industry Response: Calls for Consultation and Policy Reassessment
The proposed reforms have galvanized opposition from various industry stakeholders. Over 160,000 family-owned businesses, represented by 32 trade associations, have petitioned the government for a formal consultation on the changes.
Neil Davy, CEO of FBUK, criticized the reforms as a "hammer blow" to family enterprises, emphasizing the risk of forced sales and job losses. The Builders Merchants Federation and the Home Builders Federation, among others, have echoed these concerns, highlighting the potential destabilization of sectors integral to the UK economy.
Government Justification and Political Reactions
Chancellor Reeves defends the reforms as necessary measures to address a £22 billion fiscal deficit and to ensure tax equity. The government argues that the current reliefs disproportionately benefit a small number of wealthy estates, citing that in 2021-22, just 158 estates claimed over £500 million in BPR.
However, political figures across party lines, including Conservative leader Kemi Badenoch and Liberal Democrat leader Sir Ed Davey, have pledged to oppose the changes, advocating for the preservation of family businesses and rural economies.
Broader Impact on Family Businesses and the UK Economy
Family businesses constitute a significant portion of the UK economy, with 4.8 million such enterprises employing nearly 14 million people and contributing over £200 billion annually in tax revenues.
The proposed IHT changes threaten this sector's stability, potentially leading to decreased investments, reduced employment, and the erosion of generational enterprises. The reforms also risk undermining the unique contributions of family businesses to local communities and the national economy.
Fun Fact
Family businesses are the backbone of the UK economy, accounting for approximately 90% of all private sector enterprises.
These businesses range from small local shops to large manufacturing firms, collectively employing nearly 14 million people. Their contributions extend beyond economics, fostering community development and preserving traditional industries across generations.
Conclusion
The Labour government's proposed inheritance tax reforms aim to address fiscal challenges and promote tax fairness. However, the potential economic fallout, including significant job losses and reduced investment, has sparked widespread concern among family businesses and industry leaders. The call for a formal consultation reflects the need for a balanced approach that safeguards the interests of family enterprises while achieving fiscal objectives. As the debate continues, the government's responsiveness to these concerns will be crucial in shaping the future landscape of UK family businesses.
Frequently Asked Questions
What are Business Property Relief (BPR) and Agricultural Property Relief (APR)?
BPR and APR are tax reliefs that allow family-owned businesses and farms to pass assets to heirs without incurring significant inheritance tax liabilities, facilitating business continuity across generations.
How will the proposed inheritance tax changes affect family businesses?
The reforms introduce a £1 million cap on BPR and APR, with assets above this threshold taxed at 20%.This change could force family businesses to sell assets or close operations to meet tax obligations, leading to job losses and reduced investment.
What is the government's rationale for these tax reforms?
The government aims to address a £22 billion fiscal deficit and promote tax equity, arguing that current reliefs disproportionately benefit a small number of wealthy estates.
What has been the response from industry stakeholders?
Over 160,000 family-owned businesses and 32 trade associations have called for a formal consultation, expressing concerns about the reforms' potential to destabilize the sector and harm the broader economy.
When are the proposed inheritance tax changes scheduled to take effect?
The reforms are set to be implemented in April 2026, giving businesses a limited window to adjust to the new tax landscape.
