How family firms could be affected by Budget tax rises
David Ho
Thistle Seafoods has been a family-owned business for generations
Farmers have dominated the debate over the recent Budget’s change to inheritance tax – but the issue is much wider than that. Family businesses are affected in the same ways, and there are many more of them.
As the implications dawn on many such families, there are warnings of lower investment, lower employment, lower growth and the potential takeover of a vital part of the economy by big, and often foreign, corporates.
The change comes from the chancellor’s decision to tax assets as they pass from one generation to another.
For most people, that tax kicks in for assets worth more than £325,000, or £500,000 if the family home is being passed on.
But for farmers and 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 agricultural or business property. After that, it will be taxed at 20% – half the rate of inheritance tax required from others.
It’s not clear how many farmers that would affect. The Treasury estimates 500 per year; the National Farmers Union says it’s closer to 70,000 in total.
At least part of the wide difference may be explained by farmers also claiming Business Property Relief where their assets are in non-agricultural activity, such as holiday lets, a farm shop or a mail order company.
The number of non-farm businesses affected by this is harder to gauge, but one rough estimate is that it could be about 20 times more.
Scotland doesn’t have as many middling-sized family businesses as other economies.
But in some sectors, they play an important role – notably food processing. Well-known brands such as Tunnock’s, Baxter’s of Fochabers and Walker’s Shortbread are some of the larger ones.
One of the reasons you may not have heard such a backlash against the new tax on inherited wealth is because it’s just that – inherited wealth. These families don’t get much sympathy for their tax breaks… or at least, not as much as farmers.
The Grant family, distillers of Glenfiddich whisky, is reckoned by Forbes magazine to be worth about £2.9bn. Inheritance tax on transferring that wealth is currently nil. In future, it could be £580m.
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.
GAP managing director Mark Anderson (back middle) with other family members working in the business
As with farmers, many of these businesses are capital intensive, while not generating big incomes.
One of the sectors affected is plant hire and operation – the trucks, diggers and numerous other pieces of equipment that are required by construction and other sectors, including farming.
Family firms account for 85% of the Scottish Plant Operators Association’s 350 members. Plant hire has been largely unaffected by consolidation into larger firms.
Requiring large, expensive capital assets, it is hard hit by a tax which targets the value of assets rather than their profitability. The new tax regime will not take into account the ability of firms to raise cash to pay.
Former SPOA president Mark Anderson is managing director of GAP, the fourth largest plant hire operator in Britain.
Based in Glasgow, it is now owned by the third generation of the family. Mark’s father and uncle are past retirement age, but still work within the business.
The firm has 2,200 workers on the payroll. The most recent annual turnover reached £340m.
GAP is the fourth largest plant hire operator in Britain
Mark says that businesses like his can be loyal to workers and take long-term decisions, riding through the peaks and troughs of the business cycle. Several of those on the staff have 40 years’ experience, while two have more than 50.
If the company were on the stock market or owned by a private equity fund, it would be under pressure for short-term results.
“Some of our assets take 10 years to deliver a return. These are assets that private equity won’t go into because they don’t get a return after a year,” he says.
Mark enjoys his job and likes the people that he works with.
“I have two daughters, and I wonder if, in the future, this is something my girls would want to go into.”
Handing over to his daughters is a long way off as they’re only aged five and 10.
But following the Budget three weeks ago, planning for succession has become a major source of uncertainty and future cost for businesses like GAP.
Ryan Scatterty
Ryan Scatterty says the seafood sector is dominated by family firms
There are ways of avoiding the tax, using existing loopholes. The main way is to gift assets to the next generation, on condition that you live for seven years after the transfer.
Businesses seeking to limit their exposure to tax face making macabre judgements on the life expectancy of older members – or insuring against the death of younger ones, who could defy tax planning if they die young.
In many cases, like with the Grant family of distillers, the wealth is split across siblings and cousins. As assets pass to the next generation, there may be a slightly lower tax bill because of the £1m exemption per person.
But the need to raise cash could force some family members to sell a share, and a lot of that could destabilise the firm.
Ryan Scatterty is managing director of Thistle Seafoods near Peterhead, and is the fifth generation at the firm. It also has a processing unit in Uddingston, Lanarkshire, employs 800 people and has a £133m turnover.
He says the seafood sector is dominated by family firms who are in a similar position to the farmers in the north east of Scotland who are protesting about the inheritance tax proposals.
He says beneficiaries are unlikely to have the cash needed to pay HMRC, even with 10 years of installments.
“The only way to come up with that is to sell the business. That could be to a large multinational, which could be foreign-owned, and without that commitment to the local community,” he says.
“The question for the government is: do they want these sectors to be owned by giant multinationals?”
He also says the inheritance tax change is a disincentive to invest. If an investment was to increase a family firm’s value by £10m, he believes that the 20% tax bill at the point of death may no longer make it look financially viable.
Reuters
Rachel Reeves
Paul Andrews, founder of Family Business United, says its members were shocked by the Budget.
“It’s caused a lot of conversations around succession. The unintended consequences will be reduced investment,” he says.
Another membership organisation, Family Business UK, says it has been “inundated” by inquiries about membership and advice.
The Treasury says Rachel Reeves made the choice to raise tax both to stabilise public finances and improve public services, and that her tax choices were to put an additional burden on businesses and those with wealth.
Where tax revenue is required, it’s easier to raise it from relatively wealthy people who have died than from income or consumer taxes on those with modest incomes.
Chris Campbell – a tax specialist at Icas, the institute of chartered accountants in Scotland – says its members have been busy this month with approaches for advice.
Businesses are hoping that the pressure beign applied by farmers could lead to a change of policy.
“They’re having to re-think, but they’re also waiting to see,” he says.
“There’s no indication of a U-turn, but the farmers’ reaction may have an influence.”
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