Inheritance tax relief changes risk being silent killer for family firms: Stuart Wright

As Family Business UK has noted, “Taking the government’s own definition of a small business, far from affecting those with the broadest shoulders, a cap of £1m will affect many businesses who the Government are claiming to champion."

While farmers have protested loudly about similar changes to Agricultural Property Relief (APR), more family businesses than farms are likely to be affected and whilst most business owners have stayed quiet. But that doesn’t mean they’re safe. Owners and CFOs should be making plans now for how to meet the substantial tax liabilities which may arise without adequate planning.

Why the silence?

One of our country’s most successful exports is an overly complex and burdensome tax system, which many business owners, quietly understandably, find difficult to translate their own personal circumstances. With the draft legislation published in July, the change is fast approaching. But despite this, there’s been little outcry from business owners. That’s not because the change won’t have an impact, however. Far from it. Instead, there are two main reasons for business owners’ reticence, and neither is reassuring.

1. Uncertainty

Many business owners don’t fully understand the changes—or how they’ll be affected. Valuing a business isn’t straightforward, especially when it involves shares, property, or equipment. Even HMRC’s valuation team may struggle to apply consistent methods across different businesses.

Because it’s hard to predict when someone will pass away, what the business will be worth, or how HMRC will value it, planning ahead is tricky.

It’s not simply that owners outside of a sale or refinancing have not had to consider the value of their business; neither has HMRC. The revenue has a Shares and Valuation team, who use approved valuation methodologies. But the team is small, and the specific activities and circumstances of each business can make the choice and application of each methodology uncertain.

To date, HMRC has had to review and approve business valuations for relatively few estates. Now, it must potentially do so for any family business that transfers on death. There’s little precedent to indicate how aggressive its approach may be.

Since owners can’t be sure when the IHT liability will arise, how much the business will be worth, and what valuation will be acceptable to HMRC, it’s difficult for them to plan.

2. Financial pressure

For many owners, most of their wealth is tied up in the business. They don’t have enough personal assets to pay the IHT bill. That means the tax will likely have to be paid out of the business itself, usually through dividends, which are also taxed personally, the company already having paid corporation tax on its profits before accounting for dividends. A £1m IHT bill could take up to £2.3m in cash out of the business. This will inevitably take a significant toll on cashflow, investment plans, and staffing.

Providing for such a significant sum requires many businesses and their owners to make hard choices that will impact investments, staffing, and the business’s future. Not surprisingly, many business owners are wary of publicising this to their workers and customers particularly while uncertainty persists.

What should business owners do?

With the next Budget just weeks away, time is running out, and owners must consider their options. CFOs, meanwhile, should be talking to owners and asking what provisions are in place to meet their IHT bill, and what the company may need to do in response.

Top tips

Know your numbers: Estimate how much tax your business might owe under a worst-case scenario.

Talk to your adviser: Get help with succession planning and tax strategies.

Explore funding options: Look into insurance or other ways to cover the tax bill.

Stuart Wright is a partner at S&W