Over five million family businesses in the UK could see their tax bills almost double under Labour plans to charge income tax when owners pass their firms to children or relatives. The change, expected to be outlined in Chancellor John Healey's first Budget on October 28, would replace the current capital gains tax (CGT) treatment for such transfers.
According to Government figures, these family businesses support roughly 15 million jobs across the nation.
How the tax change would work
Currently, businesses can be transferred to the next generation in a way that only attracts capital gains tax. Owners typically convert their company holdings into "redeemable shares", which the business can then buy back, instead of selling the family firm to their children, which would trigger a massive tax bill. This method attracts CGT at up to 24%.
Under the proposed rule change, reported by The Telegraph, this method would instead be subject to income tax. The top rate of CGT is 24%, while income tax is charged at 45% for high-rate taxpayers, making the tax bill almost double.
Impact on a £1 million firm
This means a family with a £1 million firm would be forced to pay tax of up to £450,000 for passing it down using redeemable shares, compared with the current £240,000 under existing rules.
The rule change has faced backlash from Shadow Chancellor Andrew Griffith, who told The Telegraph: "This Labour Government seems determined to squeeze every part of the economy, punishing the people who take risks, create jobs and build businesses for future generations."
He added: "Not content with its Family Business Tax, Labour is once again coming after the very firms that keep our local economies running." Griffith said the changes would make it easier to sell a family business than to pass it down to your children, adding: "That cannot be right."
Treasury response
A Treasury spokesperson said: "As has always been the case, decisions on tax are a matter for the Chancellor to set out at fiscal events, rather than routinely commenting on rumour, speculation or proposals."
