What happens if tax reliefs for SMEs and farms are cut in the impending Budget?
It is the world’s worst-kept secret at this point, but if you have not already heard, the Budget is approaching and is likely to be “painful”.
Tax hikes are almost inevitable, and Inheritance Tax (IHT) and Capital Gains Tax (CGT) look the most likely to be targeted.
If we dig a little deeper into these headline makers, it could be that Business Relief (BR) and Agricultural Relief (AR) are placed under the microscope in the Budget.
These reliefs are long-standing measures that allow family-owned businesses and farms to be passed down to the next generation without triggering hefty IHT bills.
And the reason that business reliefs could be on the chopping block?
Simply put, it is all about filling up the coffers.
The Government Is seeking new ways to increase its tax revenue, and this move could impact countless small and medium-sized enterprises (SMEs) and farming families.
The roles of Business and Agricultural Relief
BR and AR, first introduced in 1976, have become vital tools for ensuring that family-run businesses can be passed down without being torn apart by large tax bills.
Under current rules, qualifying business assets benefit from either 50 per cent or 100 per cent relief on IHT, meaning that shares or property can be passed on without a substantial tax liability.
Similarly, AR allows farming businesses to pass on land and assets to children or relatives with 50 per cent or 100 per cent relief.
This is particularly important for the continuity of farms, where families often make decisions, like investing in equipment or sending children to agricultural college, based on the assumption that this relief will continue.
For many, these reliefs are seen as essential, allowing businesses to survive through generations.
On the flip side, it is argued that these reliefs have become a loophole exploited by wealthy families to avoid paying their fair share of IHT.
With this growing debate, there is increasing speculation that the Chancellor may tighten or even reduce BR and AR in the upcoming Budget.
The IHT conundrum
The Government’s motivation for reviewing business reliefs is clear.
IHT, although one of the most disliked taxes, does not bring in a huge amount for the Treasury.
In 2023-24, IHT receipts totalled £7.5 billion. This is double what was raised a decade ago, but it still only affects about five per cent of estates.
This low impact makes IHT a tricky area for reform.
Any changes would need to be radical to raise a substantial amount of revenue.
This is where reforms to business relief could come into play, as these changes would primarily affect family-owned firms, agricultural estates, and investors who utilise these reliefs to pass down wealth without a tax hit.
The AIM shares anomaly
One specific area that has caught attention is the eligibility of shares in companies listed on the AIM exchange for business relief.
While AIM shares are seen as an important source of funding for growth companies in the UK, some critics argue that business relief on these shares is a loophole exploited by investors.
This ‘anomaly’ could be a prime target for reform, with the Chancellor potentially reducing or eliminating the relief for AIM shares.
For investors, this could force them to rethink their portfolios and investment strategies.
Could gifting rules be next?
Another area that could be up for reform is the seven-year gifting rule, which currently allows individuals to make gifts during their lifetime that are free from IHT if they live for seven years after the gift is made.
There has been talk of extending this period, meaning more estates could be captured by IHT, even when individuals have given away assets in their lifetime.
While such a move might seem like an easy win for the Treasury, it could have unintended consequences.
Families often use gifting as part of their estate planning, and an extension to the seven-year rule could complicate long-term plans and result in higher tax bills for heirs.
The risk to pension pots
Currently, defined contribution pension pots are not counted as part of an estate for IHT purposes.
This allows beneficiaries to inherit substantial sums without triggering a large tax bill.
If the person dies before the age of 75, those inheriting the pension pot can even make withdrawals without paying income tax.
There are concerns that the Chancellor may also look to reform this generous tax treatment, potentially bringing pension pots into the IHT net.
This could be financially damaging for families relying on inherited pensions for security.
As we await the Chancellor’s announcements, business owners and families should begin considering their options.
With the future of business reliefs and IHT rules hanging in the balance, we are here to help you review your estate plans, reassess tax strategies, and prepare for any potential changes that might come our way.
Contact our professional team of accountants today for further advice.
