Why business owners are keeping quiet about BPR

In summary

• Despite the high-profile protests, more family businesses than farms are likely to be affected by the changes to inheritance tax relief in the last Budget 
• Such businesses have been less vocal about the change, however, with both uncertainty and a reluctance to spook employees and customers playing a part 
• If they don’t speak up, they must still act. Owners and CFOs should be making plans now for how to meet the liability 

Farmers are not giving up. Since the Chancellor announced changes to agricultural property relief (APR) and business property relief (BPR) at last year’s Autumn Budget, the country has seen repeated protests about increased inheritance tax charges facing family farms. Earlier this month, the National Farmers’ Union was again asking to meet with Rachel Reeves, armed with a new report that working farmers, rather than non-farming landowners, would be hardest hit. 

But it’s not just farms affected by the changes from next April. The reduction in BPR means that business assets over the £1 million threshold will no longer pass free from inheritance tax, potentially affecting tens of thousands of family businesses.  

As Family Business UK has noted, “Taking the government’s own definition of SMEs, far from affecting a small number of those with the broadest shoulders, a cap of £1m will also affect many small and medium sized businesses who the Government are claiming to support. And without indexation, the £1m cap also means that more SMEs will fall within scope over time.” 

With the draft legislation published in July, the change is fast approaching. But despite this, there’s been little outcry from business owners. That’s not because the change won’t have an impact, however. Far from it.  Instead, there are two main reasons for business owners’ reticence, and neither is reassuring. 

The first is continuing uncertainty about, and occasionally ignorance of, the upcoming changes. Some business owners are still unaware of the reduction in relief. Many more are unclear about its impact.   

The latter is almost inevitable because of the uncertainties involved. The reduction in BPR means that business assets over £1 million will attract an effective IHT charge of 20%. In some cases, the main assets may be plants, equipment, machinery or property. For many, it will be shares in the business, the valuation of which can be highly subjective. 

It’s not simply that owners outside of a sale or refinancing have not had to consider the value of their business; neither has HMRC. The revenue has a Shares and Valuation team, who use approved valuation methodologies. But the team is small, and the specific activities and circumstances of each business can make the choice and application of each methodology uncertain.  

To date, HMRC has had to review and approve business valuations for relatively few estates. Now, it must potentially do so for any family business that transfers on death. There’s little precedent to indicate how aggressive its approach may be.  

Since owners can’t be sure when the IHT liability will arise, how much the business will be worth, and what valuation will be acceptable to HMRC, it’s difficult for them to plan.   

The second reason some business owners are holding back from speaking out on BPR, however, is that the consequences are clear enough – and they are not keen to publicise them.  

Where an IHT liability will arise that the owner’s other personally owned assets won’t cover, the business faces funding a bill that’s not just 20% of its value over £1 million (the inheritance tax bill), which is already a huge commitment; it must also be paid through the estate by way of a dividend taxed at income tax rates. And, of course, the company will be paying corporation tax on its profits before a distribution is made. 

Providing for such a significant sum requires many businesses and their owners to make hard choices that will impact investments, staffing and the business’s future. Not surprisingly, many business owners are wary of publicising this to their workers and customers – particularly while uncertainty persists.  

With significant economic headwinds and the next Budget just a couple of months away, many business owners are keeping quiet and holding off on big decisions. But time is running out, and owners must consider their options. CFOs, meanwhile, should be talking to owners and asking what provisions are in place to meet their IHT bill – and what the company may need to do in response. 

Keeping quiet won’t make the issue go away.