Business Finance: Julie Steel explains an Inheritance Tax shock contained the ‘small print’ of the Budget

Julie Steel of KPMG

Julie Steel of KPMG

GENERALLY, the family business sector in the UK has been well supported by Government policy and there are many tax incentives that are particularly favourable to family businesses which they should make sure they are aware of and are making full use of.

Capital allowances, research and development tax credits and favourable Capital Gains Tax reliefs can all help to lessen the tax liability for a family business but, by its very nature, Inheritance Tax is a major issue for business owners looking to pass on their business to the next generation.

So announcements last month in the Budget which signalled the prospect of significant new Inheritance Tax liabilities for business owners will have come as quite a shock.

The Chancellor has confirmed that the Inheritance Tax-free band will be frozen at £325,000 until at least 2017/18. More families will, therefore, over time, have to pay Inheritance Tax. But, hidden away in the small print, and caught up in his plans to crack down on anti-avoidance, emerged an even more worrying development for business owners.

A business is normally exempt from Inheritance Tax because of a specific relief known as business property relief. However, the house in which the owner lives is subject to Inheritance Tax. It was, therefore, commonplace for the business owner to borrow from a bank to fund his or her business, but to give the bank as a security for its loan a charge over their home.

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This was very tax efficient – the debt to the bank reduced the value of the house for Inheritance Tax purposes and hence the Inheritance Tax bill.

However, this much-used vehicle to help fund businesses, which can often struggle to find funding in the current economic environment, is to be stopped. The Budget provides that debts to fund a business cannot be used to not pay an Inheritance Tax bill on other assets.

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This means that business owners face new Inheritance Tax bills, many of them for the first time.

Confirmation of the plans was published in the recent Finance Bill, meaning that some business owners may now have to budget for unexpected Inheritance Tax bills and could be faced with a horrible choice – should their heirs sell the family home or will the business pick up the tax bill?

: : Julie Steel is a family business adviser at KPMG in East Anglia.

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