Next week the UK government is expected to implement stricter inheritance tax rules. In turn, high-net-worth individuals and families are increasingly interested in how their wealth can be transferred. Sir Michael Eavis, the 89-year-old farmer who founded the Glastonbury Festival, has taken an important step in that direction. He has already passed his 37% shareholding in the company to his daughter, 46-year-old Emily Eavis. This is an important strategic move for wealthy families and they know it. They intend to put something in place before the new rules go into effect.
In April 2024, the UK will introduce a £1 million BPR cap. Now, this new policy is raising alarm bells for business owners and farmers alike. Thousands have already hit the streets in London to protest the draconian changes. They are concerned that the new tax environment will threaten their family businesses and economic legacies.
The Impending Tax Changes
The duty of HM Revenue and Customs (HMRC) to crack down on inheritance tax is being ramped up. Without question, these imminent changes will affect family businesses in a big way. Thanks to new regulations, businesses will be taxed at a rate of 20% for anything beyond £1 million in value. HMRC will levy a maximum of 6% on pertinent assets above this limit. It is collected on each ten-year anniversary of the trust.
As a small business owner, John Spencer is concerned about the added financial burden these changes might place on his company. Today his business is worth about £20 million. He stated, “An ever-present threat to the survival of the business,” highlighting the potential implications for his operations. Without proactive measures such as transferring shares or assets, Spencer could face an inheritance tax bill of around £4 million.
Gifts made seven years before a person’s death are still excluded from inheritance tax. Gifts made three to seven years before death are eligible for taper relief. This would create a progressive scale of taxation on those gifts. This fosters a misleading sense of urgency that can pressure families to act quickly and decisively reduce their tax liabilities all while increasing the overall value of their estate.
Family Businesses Adjusting Strategies
The paradigm shift introduced by the new tax policy has caused a number of family-owned businesses to re-evaluate their shareholding structures. Notably, Arnold Clark Automobiles, founded in 1954 by Sir Arnold Clark, is now chaired by his widow, Lady Philomena Butler Clark. The firm grew to a 200-branch dealership covering the entire UK during the boom. Last year, it congratulated itself on reaching a pre-tax profit of £120.7 million on revenues of £5.15 billion.
To meet this level of challenge presented by the new regulations, Clark’s sons, John and Adam, did something extreme. They moved their shares to ten new shareholders, who all appear to be trustees. This approach to planning not only enables them to better weather the upcoming tax storm, but provide their family dynasty with lasting security.
Chris Etherington, a financial valuation specialist, pointed out that HMRC already has sufficient data available for asset valuations. The agency is still hardpressed to go fully digitalized, even in realms such as inheritance tax policy. This gap could make compliance more difficult and create additional confusion for families trying to navigate new financial plans.
The Broader Impact on Wealth Transfer
The current debate over inheritance tax reform sheds light on an important trend in how families are transferring wealth. Angus Hanton, co-founder of the Intergenerational Foundation, remarked, “One of the effects of the changes is that people get money when they need it more, when they are younger, rather than in their 50s when they perhaps need it less.” This point of view nudges families to think about making their transfers of wealth sooner than later, so those beneficiaries can make the most of their inheritances.
Not everyone is on board with the speedy changes. Stuart Adam commented, “Yes, some people will do this, but that shouldn’t stop change from going ahead.” His words express the need for finding a balance between complying with evolving regulations while maintaining fairness in our taxation system.
John Spencer further elaborated on the hesitancy he sees within the business community: “Nobody wants to invest; everyone is just battening down the hatches and weathering out the storm.” He said that when tax laws are changed, it puts huge pressure. This pressure creates a sea of uncertainty, which prevents expansion, innovation and investment in the family business space.
The effect of these changes goes beyond simply economic consequences. It ripples through the labor force to boot. Spencer lamented, “The really sad thing is that the losers are the guys who work for us,” emphasizing the human aspect of these fiscal decisions.