British farmers dominated the initial debate over the Budget’s change to inheritance tax (IHT), but it is all types of family businesses that are impacted with profound implications on succession planning.
The Chancellor’s decision to tax assets as they pass from one generation to another means that, for most, IHT kicks in for assets worth more than £325,000, or £500,000 if the family home is being passed on. But for family businesses, passing on assets from one generation to the next is currently tax free. And that tax relief has been unlimited.
Chancellor Rachel Reeves plans to exempt the first £1m of business property, after which it will be taxed at 20 per cent, half the rate of inheritance tax required from others. Some sectors are warning there could be unintended consequences from forcing families, in some cases, to turn a fifth of their assets into the cash necessary to pay HMRC.
The change means that some of Scotland’s largest family businesses, household names such as Tunnock’s, Baxters of Scotland and Walker’s Shortbread – whose patriarch Sir Jim Walker died recently – will now face considerable inheritance tax bills when they pass the businesses down to younger generations.
And as for the Grant family, distillers of Glenfiddich whisky, estimated to be worth about £2.9bn, while inheritance tax on transferring that wealth is currently nil, it could soon be £580m.
Mike Kane, partner, head of business law at Turcan Connell, said that family businesses are the backbone of the Scottish economy, with the top 100 Scottish family businesses employing more than 115,000 people and generating more than £1bn in annual profits. He said that the changes to IHT will impact significantly on family-owned businesses, representing a sea change from the original position.
“For business owners where their strategy had been to pass shares under a will, they may now have reached an age where the planning under the previous rules has locked them into a difficult position and their estate will face a significant inheritance tax bill.”
He added that many business owners are looking at insurance to cover off the IHT liability and some have taken advice and implemented a succession plan, moving shares in a trading business down to family members.
“That however presupposes that there are family members who are willing and able to take on the management of a business, and that is not always the case,” said Kane.
“For some of the larger family businesses, the tax bill on death will be significant and where will those funds come from? While there is the opportunity to pay IHT over a number of years, relatively substantial cash amounts have to be found to meet the IHT bill.
“A death may come at an inopportune time; the business may be in a growth phase and have a significant working capital requirement. It may also be an asset-rich/cash-poor business.
“The IHT payment, if originated in the business, would also come from taxed money – money requiring to be extracted is likely to give rise to a tax charge.
“So, where insurance is not possible and dynastic succession is difficult, the obvious solution is to then look to sell the business.
For some of the larger family businesses, the tax bill will be significant and where will those funds come from?
“What impact has the death of the owner had on the business and how does that affect value? What if the business is in a rural location and difficult to attract a buyer or it is in a sector or of a size which struggles to find buyers?”
One sector confronting these questions is plant hire and operation. Scottish plant owners contribute £7.4bn to the economy and directly employ more than 43,000 people.
Most businesses in Scotland’s plant sector are family businesses, and mor than 90 per cent of them are SMEs. Indeed, the UK’s largest privately-owned crane hire company and the UK’s largest privately-owned plant hire company are both Scottish family businesses.
Plant businesses are typically heavily invested in expensive assets and property, taking them significantly over the £1m allowance for 100 per cent business property relief (BPR), meaning they are hard hit by a tax targeting the value of assets rather than their profitability.
Due to year-on-year investment in their business, owners will not typically have the cash reserves for a one-off inheritance tax event.
John Sibbald, president of the Scottish Plant Owners Association (SPOA), argues that to generate the cash to pay for this tax, owners will be forced to sell all or part of their business, likely to private equity, a PLC or an overseas company with less interest in local communities or in retaining local jobs than family businesses.
Not only will the change impact on the pool of likely buyers and the valuation of the business effectively being forced to sell, but it would result in redundancies as administrative functions would be combined regardless of the buyer.
The SPOA believes that a worst-case scenario is that jobs will be lost from Scotland and the UK altogether. “The announcements made in the Budget pose a grave and unprecedented threat to Scotland’s plant industry and other similar businesses throughout the UK,” said Sibbald. “These proposals are shockingly unjust, woefully misguided, and threaten to dismantle one of the UK’s most dynamic and enduring sectors – private, independently owned family enterprises – dealing a devastating blow to communities and putting countless livelihoods at risk.”
For some of the larger family businesses, the tax bill will be significant and where will those funds come from?
Ritchie Whyte of Aberdein Considine described the restriction on BPR as “the most significant change to the family business tax landscape in a generation” and a matter of concern to his clients.
“People are concerned about a situation where they may have to sell a business to pay IHT – or funds that may otherwise have gone into the growth of the business may have to be diverted to pay IHT,” he said.
Whyte said that it was a challenging budget for business in terms of the wider economic environment and the IHT changes. Consequently, he is encouraging clients to revisit their plans for succession.
“Succession planning is a horrendously complex business and a personal emotional rollercoaster for most family businesses which is why it never seems to happen when it should, and it’s elongated,” said.
“Following the Budget, there’s a real sharp focus on the risk and the downside of not getting these things right. We’re recommending family business owners revisit their succession plans.
“There are things that can be done to mitigate IHT but it’s important that this is done as part of a comprehensive plan with input from relevant professional advisers. A kneejerk reaction is inadvisable.”
Whyte forecasts that the IHT changes will see family businesses engaging in sensible succession planning discussions earlier and bringing forward M&A events and exit plans to allow for lifetime gifting, because they are now faced with that IHT liability.
Kane said that the policy sitting behind the tax change looks as if it is designed to drive business sales to meet IHT bills.
“In the family business sector, broadly only one in three family businesses make it from founder level to second generation yet the backbone of the economy is family-owned businesses and if the prediction is that the policy will reduce this ratio still further, is that good for the UK economy?” he asks.
“Look then at who is buying the companies and where the control and profits end up.”
