Farmers aren’t the only ones affected by inheritance tax changes
Most of the coverage of inheritance tax has focused on farmers but they make up a tiny proportion of the businesses that will be hit by this unfair levy, it’s time for family businesses to speak up, says Lucy Williams
While I have every sympathy for the farming community, many would be forgiven for thinking that the inheritance tax (IHT) changes announced in the October 2024 Budget will only affect them. That’s certainly the impression you’d get from the headlines.
But the truth is, these changes will impact thousands of businesses across the country, particularly family-run enterprises. Yet, the wider business community has been largely absent from the conversation, despite facing the same financial burden as farmers.
The bigger picture: Why aren’t small businesses being heard?
Most of the outrage over IHT reform has centred on the farming industry. Yet farming businesses make up only a small percentage of the UK’s family businesses. While their concerns have been widely covered, the vast majority of family businesses operating in other industries – manufacturers, retailers, logistics firms, care providers and more – are facing the same challenges with little to no attention.
Family businesses account for 93 per cent of all private-sector businesses, yet farming represents less than five per cent of that figure. The overwhelming majority of business owners will be just as affected by these changes, if not more so, yet their voices remain unheard.
If these tax changes will impact thousands of businesses across the UK, why is the focus so narrow?
How IHT changes will hit SMEs hard
Currently, Business Property Relief (BPR) and Agricultural Property Relief (APR) protect many businesses and farms from IHT. But from April 2026, these reliefs will be capped at a combined lifetime limit of £1m. Any value beyond the limit will be exposed to Inheritance Tax at 20 per cent (compared to the usual 40 per cent rate).
A £1m threshold may sound like a lot, but in reality, many smaller businesses will find themselves affected, not just the biggest players.
Let’s look at an illustration: Redbox Limited, a small manufacturing business in Liverpool that has been passed through generations since its inception in the 1860s. Today, it employs over 100 staff and generates modest annual profits of around £50,000. However, after years of reinvestment, the business owns its premises, now valued at £2m.
Under the new tax rules, if the current owner were to pass away, their children could be hit with a £200,000 IHT bill, money they don’t have.
Many businesses lack the liquid cash to cover these bills. The likely outcome? Selling the factory just to pay the tax, putting more than 100 jobs at risk.
And it gets worse. Many non-farming businesses operate through limited companies, meaning that to pay the IHT bill, heirs would have to extract cash from the business, triggering up to 39.1 per cent in additional income tax. This means almost double the cash is required just to meet the IHT liability.
The government insists that only 2,000 estates will be affected by these changes. But how reliable is that figure? Anyone who has dealt with HMRC’s IHT teams knows their processes are manual, slow and prone to delays. If even HMRC doesn’t have real-time oversight, how can Labour claim to know the true impact?
From my own experience, the number will likely be far higher. My firm works with hundreds of businesses that will be affected, and I am certain our clients are not the only ones.
A critical choice: IHT or CGT?
One consequence of the new IHT changes that has been largely overlooked is how they interact with Capital Gains Tax (CGT).
Currently, when someone inherits a business, they receive it at its market value at the time of death. If they sell the business later, CGT is only due on any increase in value from when it was inherited, effectively giving heirs a tax-free uplift on the value at the time of death.
However, under the new rules, many business owners will feel forced to transfer assets during their lifetime to avoid a large IHT bill. While this may reduce the IHT burden, it removes the market value uplift, meaning heirs will pay more CGT if they sell the business in the future.
Before these changes, businesses could pass IHT free, with beneficiaries having reduced CGT bills if the business was later sold. Now, business owners have two choices: Pass down the business during lifetime to avoid IHT, but then face higher CGT in the future, or keep it until death and accept a large IHT bill.
Although the government did not directly legislate against the tax-free uplift, the restrictions on BPR and APR make this an indirect consequence of the new rules. This outcome was widely anticipated before the Budget, and while no direct changes to CGT were introduced, these IHT limits achieve a similar effect, pushing business owners into difficult financial decisions.
Labour’s claims don’t add up
Labour wants the public to believe these tax hikes “won’t affect working people.” But that’s simply not true. If you tax the businesses that create jobs, those jobs – and the people who rely on them – will suffer.
The National Insurance hike is another example. The increases apply to employer NICs, not employee NICs, meaning most workers don’t pay them directly. However, the impact is very real. When businesses face higher employment costs, they have less cash for recruitment, wage increases, and investment.
This isn’t just about IHT; businesses are facing a raft of policy changes that make it harder to operate, grow and hire.
What Labour should be doing instead
If Labour is serious about economic growth, it needs to rethink its approach. Raising the IHT relief threshold for businesses from £1m to at least £5m would be a more realistic and fair adjustment. While some businesses would still need to sell assets, this would protect the majority of smaller, more modest businesses.
Labour should also introduce an Employment Allowance boost for labour-intensive industries, such as hospitality and retail, where employer NIC hikes are hitting the hardest.
Another crucial step would be allowing businesses to pay IHT directly on their assets, rather than forcing heirs to extract dividends first, which results in double taxation.
If Labour is truly committed to making the UK a business-friendly economy, it needs to stop targeting businesses and focus on real, long-term tax reform and the growth agenda they promised.
Enough is enough – it’s time to speak up
Farmers have shown what happens when an industry makes enough noise: they get heard.
Now, businesses, entrepreneurs and longstanding family-run firms must do the same.
If Labour refuses to listen, business owners must make themselves impossible to ignore. That means petitioning for changes, lobbying MPs and ensuring this issue stays in the media. The government must understand that undermining small businesses will not go unnoticed, or unchallenged.
The Spring Statement is Labour’s chance to prove it is pro-growth, before it’s too late.
Lucy Williams is managing partner at business advisory and accountancy firm, JS