Scrapping business relief could hasten decline in SMEs

31 October 2023

In the recent Labour party conference, Rachel Reeves alluded to closing tax ‘loopholes’ for the wealthy. This reportedly includes giving consideration to the abolition of business relief (“BR”), an inheritance tax (IHT) relief. Is this relief really a tax loophole and what might be the consequences of scrapping BR? Let’s look at the statistical evidence against the history and purpose of the reliefs. 

BR was first introduced in the 1976 Finance Act - almost 50 years ago. Its original purpose was to ensure that after the death of the owner, a family-owned business could survive as a trading entity, without having to be sold, fragmented, or dissolved to pay an IHT liability. Subsequently, BR was extended to encourage investment into trading businesses by others who may not run the business themselves.

BR can apply to certain types of business assets, such as unquoted shares in unquoted companies, assets of sole-trader businesses and partnerships. It reduces the value of these assets for IHT purposes either by 50% or 100% depending on the type of asset and its use. 

In absence of any reliefs, IHT is paid at up to 40% on death estates where the value exceeds the available nil rate band (NRB) and residence nil rate band (RNRB). For a married couple or civil partners, the maximum, tax free threshold can be up to £1m. 

So why is BR being badged as a loophole? The latest available statistics show that BR was claimed by 3,380 estates out of a total number of estates subject to IHT of 27,000 in the financial year to 31 March 2021. In that same year, the value of assets on which BR was claimed in estates was £3.2bn. It is difficult to definitively confirm the true tax cost of BR as if the asset qualified for BR in full, the valuation of that asset may not have been subject to significant scrutiny by HMRC. However, if we take a broad-brush approach and assume the IHT saved is at a rate of 40%, that equates to BR costing the Exchequer around £1.28bn in 2020-21. 

Small and medium enterprises (SMEs) account for more than 99% of businesses in the UK, and for approximately half the total employment and turnover of private-sector UK business. The estimated turnover of UK SME businesses is £2.4tn.

The UK’s definition of SMEs does not include balance sheet figures. The EU includes this parameter covering a value range of less than €2m for micro businesses to less than €43m for medium businesses. The statistics suggest that a significant number of SMEs will be valued above the combined NRB and RNRB threshold and their owners’ estates are likely beneficiaries of BR. That is supported by the survey findings of Legal and General in their 2019 State of the Nation Report. Their findings outline that of the established businesses surveyed (taken to mean those more than 10 years old, 46% of the total), the average profit was £342,000 and the average age of the owners was 53 years old.

Consequently, if BR is scrapped, thousands of businesses that are crucial to the UK’s economy could be adversely impacted. An IHT liability would arise unless the business assets were transferred to a spouse or civil partner on death, which clearly may not always be possible and in many cases, may not be the desired commercial outcome. 

Without BR, the death of a business owner could mean the death of a family-run business. Executors may well be forced to sell or wind up the business to pay the IHT bill. 

BR has come under scrutiny before and the argument is that it is too generous, benefits only a few estates and is expensive. The wider consequences of scrapping BR should be considered in more detail and a consultation launched before any rash political decisions are made. Whilst the number of estates impacted may only be seen as modest, every business will carry an additional business continuity risk if BR is scrapped and will need to take steps, such as taking out potentially costly insurance policies to counter this. This could put further pressure on those businesses already struggling to re-establish themselves after the pandemic amidst the spectre of a possible recession. 

Businesses require certainty and stability and it’s vital that any suggested changes are the subject of a consultation to ensure that politicians and the Treasury get a true picture of the potential impact scrapping BR may have.