Navigating tax changes are crucial for family business succession planning

Incoming Labour government may look to CGT and inheritance tax to plug spending shortfall

Inheritance tax remains unpopular for many reasons
With only 4% of UK estates currently subject to inheritance tax, the urge for a tax-strapped Exchequer to review the inheritance tax rates and exemptions may be tempting after the election

Tax is rarely far from the agenda when it comes to discussions around political party manifestos in the build-up to a general election.

With a Labour government looking increasingly likely after Thursday’s vote, it is interesting to note that the party has stated that it will not raise taxes for working people, protecting income tax, national insurance and VAT from increases. But Labour has been largely silent on inheritance and Capital Gains Tax (CGT).

The shortfall between Labour’s proposed spending and what the party will raise in taxes could be addressed shortly after the election with an early Budget.

It is likely that any incoming Labour government will look to CGT and inheritance tax to plug the shortfall in their spending commitments.

And with family businesses being such a mainstay of the Northern Ireland economy, what could this mean for family business owners in terms of succession planning and passing wealth down the generations?

CGT is a levy on any profit a family business owner makes when they sell or dispose of an asset, such as company shares or an investment property. Crucially, family business owners can be liable for CGT even if they gift any asset and receive no money for it.

It is often seen as a tax for the wealthy and one which the Conservative party reduced during their time in office from the higher rate of 28% to 20%, and the lower rate of 18% to 10% for all gains apart from those on residential investment property, which currently remains at 28% and 18%. It is sometimes possible for family business assets or shares to qualify for a lower rate of CGT or for the gain to be deferred in specific circumstances.

Although not increasing the rate of CGT, the Conservative government has reduced the tax-free threshold from £12,300 in 2020 to £3,000 in 2024, which some see as a tax increase by stealth. This leaves very little wriggle room to reduce this any further, which is likely to lead to significant increases in the base rate of CGT.

The little-known and very valuable CGT relief is an uplift on death, rebasing the deceased person’s assets with no CGT liability, and a withdrawal of this relief would see significant tax receipts.

After deducting allowances and exemptions, inheritance tax is charged at the rate of 40% - and is also charged on some lifetime gifts made in the last seven years of your life.

The UK is something of an outlier in Europe and, indeed, our neighbours in the Republic charge up to 33% on lifetime gifts. Gifting in the UK is often seen as an effective way of passing inheritance down the generations without incurring an inheritance tax liability.

With only 4% of UK estates currently subject to inheritance tax, the urge for a tax-strapped Exchequer to review the inheritance tax rates and exemptions may be too tempting.

Inheritance tax is not charged on pensions pots or assets that qualify for business property relief.

Legal Matters
Barry McDonough

This can lead to effective tax planning where an individual invests in portfolios that qualify for business property relief or pension policies. Individuals often leave a pension policy largely untouched while using own capital assets to live off, thus mitigating against a large inheritance tax liability.

The new government’s plans on taxation will be confirmed over the coming weeks. While it’s difficult to predict precisely what changes are looming, it’s crucial that family business owners begin succession planning at the earliest stage possible to protect the assets they worked so hard to build.

  • Barry McDonough is an associate at Arthur Cox