Budget attack on IHT business relief ‘could drive away entrepreneurs’

Entrepreneurs could be driven away from the UK if the Labour government attacks business relief on inheritance tax in the autumn budget, says tax expert Karen Chadwick.

Her warning follows prime minister Sir Keir Starmer’s admission that the budget, scheduled for Wednesday, October 30, would be ‘painful’.

Labour has pledged not to hike taxes on working people, such as income tax, employees’ national insurance and VAT. But the government has said it will have to increase other taxes.

There is speculation that inheritance tax could be targeted along with capital gains tax (CGT) and pensions, as well as a potential stealth tax.

Karen, who leads the private client tax offering at independent accounting and business advisory firm HURST, said changes to business relief on inheritance tax (IHT) could damage the UK economy.

Inheritance tax is usually charged at 40%, but business owners can currently qualify for up to 100% relief against the value of their company.

Karen said that there is real concern from entrepreneurs that this relief is at risk of being attacked in the budget.

“It enables a business to be passed on without a penal IHT charge on death and, where appropriate, during lifetime. If this relief is removed or restricted, this could lead to an even wider pool of assets falling within the scope of IHT on death,” she said.

“This could be detrimental for UK business and growth and could drive away entrepreneurs from the UK.

“If company shares are valued and subject to an IHT charge on death, this is what is known as a ‘dry’ tax charge, meaning there is no liquid cash with which to pay the tax as the value is locked within the shares.

“In my opinion, this could be adverse and damaging for the UK economy, given that we rely so extensively on owner-managed businesses to create jobs, and given that jobs are essentially created by people and not by government, despite their claims.”

IHT receipts for the government are increasing dramatically, raising more than £7bn a year.

Karen said: “There is much that owners and families can be doing generally in terms of IHT planning and passing assets down to younger generations to plan against a 40% IHT charge on death.

“Trusts and family investment vehicles can be efficient vehicles worth considering, although given the timescales between now and the budget and the level of uncertainty we are faced with, it is advisable to wait for the new rules and legislation before undertaking any detailed planning and restructuring.”

She said agricultural property relief on inheritance tax could also be at risk of being targeted in the forthcoming budget, as well as an increase to CGT, a possible reduction in pension tax relief, and new rules on domicile and non-doms.

“Potentially quite dramatic proposals and changes are coming our way,” she added.

“Surely Labour needs to support businesses, and hitting them with increased CGT could affect the government’s wider plans to grow the economy.”

Further changes and reforms to the taxation of pensions are possible, including the potential introduction of a flat rate of pension tax relief.

Karen said this measure would be less generous for higher earners, and some opponents argue it could discourage saving for the future and be complex to implement.