Budget Tax Changes: Potential Impact on Family Businesses

While farmers have been central to discussions regarding the recent Budget’s alterations to inheritance tax, the scope of this matter extends considerably further. Family-owned enterprises face similar impacts, and their number significantly exceeds that of farms. As these consequences become apparent to numerous affected families, concerns are being raised about reduced investment, decreased employment, slower growth, and the possible acquisition of a crucial economic segment by large, frequently foreign, corporations. This modification stems from the chancellor’s determination to impose taxes on assets upon their transfer between generations. Typically, this tax applies to assets exceeding £325,000 in value, or £500,000 when a primary residence is inherited. However, for agricultural producers and businesses, the intergenerational transfer of assets is presently exempt from tax, and this relief has had no upper limit. Chancellor Rachel Reeves intends to waive tax on the initial £1m of agricultural or business property. Beyond this threshold, a 20% tax will be applied, which is half the inheritance tax rate levied on other assets. The precise number of farmers who would be impacted remains uncertain. The Treasury projects 500 annually, while the National Farmers Union suggests the figure is closer to 70,000 overall. A portion of this significant discrepancy might be attributed to farmers also utilizing Business Property Relief for assets involved in non-agricultural operations, including holiday rentals, farm shops, or mail order businesses. Quantifying the number of non-agricultural enterprises impacted by this change is more challenging, yet a preliminary estimate indicates it could be approximately 20 times greater. Scotland possesses fewer medium-sized family-owned companies compared to other economies. Nevertheless, in certain sectors, particularly food processing, they hold significant importance. Prominent brands like Tunnock’s, Baxter’s of Fochabers, and Walker’s Shortbread represent some of the larger examples. A possible explanation for the limited public outcry against the new levy on inherited wealth is its very nature – wealth passed down through generations. These families typically receive little public empathy for their tax exemptions, or at least, less than farmers. The Grant family, known as distillers of Glenfiddich whisky, is estimated by Forbes magazine to possess a net worth of approximately £2.9bn. Presently, inheritance tax on the transfer of this wealth is zero. In the future, this could amount to £580m. Certain industries are cautioning about potential unforeseen repercussions arising from compelling families, in specific instances, to convert 20% of their assets into liquid funds required for HMRC payments. Similar to agricultural enterprises, many of these companies demand substantial capital investment without necessarily producing high revenues. Among the impacted sectors is plant hire and operation, encompassing the trucks, diggers, and various other machinery essential for construction and other industries, including agriculture. Family-owned companies constitute 85% of the 350 members of the Scottish Plant Owners Association. The plant hire industry has remained largely untouched by mergers into larger corporations. Given its reliance on substantial, costly capital assets, it is significantly impacted by a tax that focuses on asset value instead of profitability. The revised tax framework will disregard companies’ capacity to generate cash for payments. Mark Anderson, former president of SPOA, serves as managing director of GAP, Britain’s fourth-largest plant hire operator. Headquartered in Glasgow, the company is currently managed by the family’s third generation. Mark’s father and uncle, though beyond retirement age, continue to be involved in the business. The company employs 2,200 staff members. Its latest annual turnover amounted to £302m. Mark states that enterprises such as his demonstrate loyalty to employees and make long-term strategic choices, navigating the fluctuations of the economic cycle. Several staff members possess 40 years of experience, with two having over 50. Were the company publicly traded or owned by a private equity fund, it would face demands for immediate financial outcomes. “Some of our assets take 10 years to deliver a return. These are assets that private equity won’t go into because they don’t get a return after a year,” he says. Mark finds satisfaction in his profession and values his colleagues. “I have two daughters, and I wonder if, in the future, this is something my girls would want to go into.” The transfer of the business to his daughters is distant, given their ages of five and 10. However, since the Budget three weeks prior, succession planning has emerged as a significant cause of uncertainty and prospective expense for companies such as GAP. Methods exist to circumvent the tax by utilizing current legal provisions. The primary approach involves gifting assets to the subsequent generation, provided the donor survives for seven years post-transfer. Companies aiming to reduce their tax liability must make grim assessments regarding the longevity of older family members, or alternatively, secure insurance against the premature demise of younger individuals, which could disrupt tax strategies. Frequently, as exemplified by the Grant family of distillers, wealth is distributed among siblings and cousins. When assets are transferred to the next generation, the tax obligation might be marginally reduced due to the £1m exemption per individual. Nevertheless, the necessity of generating liquid funds might compel certain family members to divest a portion of their holdings, potentially destabilizing the enterprise. Ryan Scatterty, managing director of Thistle Seafoods located near Peterhead, represents the fifth generation involved with the company. The firm also operates a processing facility in Uddingston, Lanarkshire, employs 800 individuals, and records a turnover of £133m. He notes that the seafood industry is predominantly composed of family-owned businesses, which find themselves in a comparable situation to the farmers in northeast Scotland currently protesting the proposed inheritance tax changes. He asserts that beneficiaries are improbable to possess the requisite cash to settle payments with HMRC, even with a decade-long installment plan. “The only way to come up with that is to sell the business. That could be to a large multinational, which could be foreign-owned, and without that commitment to the local community,” he says. “The question for the government is: do they want these sectors to be owned by giant multinationals?” He further indicates that the alteration to inheritance tax discourages investment. Should an investment boost a family firm’s valuation by £10m, he contends that the 20% tax liability upon death might render it financially unfeasible. Paul Andrews, who founded Family Business United, reports that its members reacted with shock to the Budget. “It’s caused a lot of conversations around succession. The unintended consequences will be reduced investment,” he says. Family Business UK, another membership body, reports being “inundated” with requests for membership and guidance. The Treasury asserts that Rachel Reeves opted to increase taxation with the dual objectives of stabilizing public finances and enhancing public services, and that her tax decisions aimed to impose an extra burden on businesses and affluent individuals. When tax revenue is necessary, collecting it from deceased individuals of relative wealth is simpler than imposing income or consumer taxes on those with moderate earnings. Chris Campbell, a tax specialist at Icas, the Institute of Chartered Accountants in Scotland, notes that its members have been actively engaged this month with requests for counsel. Businesses are optimistic that the pressure exerted by farmers might prompt a policy revision. “They’re having to re-think, but they’re also waiting to see,” he says. “There’s no indication of a U-turn, but the farmers’ reaction may have an influence.”