Will Labour tax family firms into extinction?

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Let’s go fly a kite? There has been rather less briefing about proposals to be announced in next week’s Budget than in recent years. The Chancellor of the Exchequer, John Healey, has been far less forthcoming than his predecessors, Rachel Reeves and Jeremy Hunt, whose plans were dribbled out weeks in advance. Some have suggested this proves that, under Healey, the Treasury is a tight ship. Others, less kindly, say that the Chancellor had no idea what to do and so there has been nothing to leak.

Either way, the briefings are now coming through thick and fast. A bank tax would seem likely. This would doubtless be popular, at least on the day. The public would have the delusion that it would not cost them anything – as it would be paid by those awful fat cat bankers. In reality, banks are already heavily taxed. If their response to another tax hike was to charge higher interest rates, or to be more risk-averse about lending to new businesses, or to international banks relocating to London, then the net result will be to make us all worse off.

But the Daily Telegraph has brought us even more startling news: ‘Healey plans Budget raid on family businesses.’ It says:

The Chancellor is considering proposals to levy income tax when business owners hand their company down to the next generation, potentially almost doubling the bill.

At present, transfers can be structured so they attract capital gains tax, which is charged at a lower rate.

The plan would affect entrepreneurs who wanted to retire, in an attempt by Labour to raise hundreds of millions of revenue. Family businesses have already been hit by inheritance tax changes that are expected to generate £300m a year.

What could be more damaging to the social as well as the economic fabric of the nation than to single out family businesses for punishment? Yet that seems to be the idea. If you build up a business and sell it on the open market to a stranger, you pay capital gains tax of 24%. But to transfer ownership on to the next generation of your family would mean you would have to pay income tax of 45%.

Tax expert Dan Neidle defends the proposal as closing a complicated loophole. He says by issuing new shares someone can avoid paying tax on their dividends from their company and still own it. The tax system is certainly fiendishly complicated. But have you noticed that whenever the Treasury comes up with ‘technical changes’ to address ‘anomalies’ the answer is always higher tax rather than lower tax? Neidle concedes that there ‘is a real issue’ but that it is ‘likely unintended’ – so that’s all right then.

Perhaps this is cock up rather than conspiracy. Treasury mandarins merely looking to raise some extra money rather than a ‘class war’ motivation by socialist politicians. But that would be of little comfort to the families being penalised.

John Endacott, a partner at accountants PKF Francis Clark, says: ‘Long-standing family companies are still adjusting to the inheritance tax changes. Further taxes on passing businesses to the next generation risk taxing them to extinction.’

Has the Government learnt nothing from the response to the family farm tax? Farmers faced paying inheritance tax on assets worth more than £1 million. This showed a complete failure to understand that, continuing as farms, these businesses were notionally asset rich while often very cash poor. These were generations who would get up very early in the morning, working hard to keep the rest of us fed because they love their way of life, and they were faced with a tax that threatened its future viability. It also broke an election promise. After tractors in Whitehall and some cases of suicide, the Government raised the threshold, which is now set at £2.5 million. They should have scrapped the pernicious change entirely. Instead, they and other family businesses face another attack.

Three-quarters of small and medium-sized businesses in Britain are family-owned. Growing up learning how the business works as you see it operating around you is not something that can be replicated by taking a management degree. We are still a nation of shopkeepers, to use Napoleon’s sneer. But also of farmers and tradesmen and consultants for an array of services. Customers and employees usually like the human element of a family-owned business – the trust that builds up over the years.

One example is garden centres, typically family-owned. Savills report that ‘last year there were an estimated 100 closures, takeovers and retirements within the wider horticultural sector, often reflecting the challenges of operating in the sector without the benefit of scale.’

Budget kite-flying has been the cause of much damaging economic uncertainty over the years. Rumoured changes prompted people to sell up and leave the country even when they didn’t end up being implemented. But at least the process allows a clear warning to be given as to the folly of a particularly perverse idea being floated. There is still time for the Chancellor to pull back from this misguided declaration of war on family businesses.

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