If Growth Matters, scrap the Family Business Tax

By CLA Director North, Harriet Ranson

Growth was the central aspiration of Labour’s election campaign and remains the benchmark against which its economic decisions must be judged. Yet the changes to Agricultural Property Relief (APR) and Business Property Relief (BPR) have now been proven, as predicted, to be having the opposite effect: suppressing investment, weakening confidence and shrinking the productive capacity of family businesses.

The greatest frustration in this saga is that it was a Labour administration in the 1970s that first introduced specific reliefs, initially at 30% (later increased to 100% by the Conservatives), to prevent family businesses from being broken up or sold simply to pay inheritance tax bills. If Labour understood the negative impact of this tax on working families more than 50 years ago, why has that lesson been forgotten?

A tax cannot be considered fiscally successful if it destroys economic activity, reduces future revenues and leaves the Exchequer worse off in the round versus satisfying an unproven ideology which fails to differentiate between liquid wealth and businesses or assets that are valuable on paper yet generate little cash.

If Chancellor John Healey is serious about growth, the Autumn Budget must recognise that high tax burdens have yet to stimulate growth.

The strength of concern across the rural economy has prompted direct intervention from Gavin Lane, President of the CLA, who recently wrote to Prime Minister Andy Burnham and Chancellor John Healey urging them to reconsider the inheritance tax changes.

In his letter, he highlighted our research which evidenced that 89% of rural family businesses have paused investment because of the reforms, while the majority believe the £2.5 million threshold is insufficient. Nearly a third expect they would need to sell more than a quarter of their land to meet future liabilities, with one in four believing they could be forced to sell more than half either of which would result in unviable businesses.

He warned that, rather than generating growth, the changes are forcing businesses to "shrink, pause, and cancel investment", undermining jobs, productivity and confidence across the rural economy.

Crucially, he argued that the projected Treasury gains fail to account for the wider loss of tax revenues resulting from reduced investment and economic activity, concluding that reversing the reforms in the Autumn Budget would send a clear signal that the Government is serious about growth, investment and supporting family businesses and has understood the real-world impact of the previous policy.

The fundamental flaw in the policy is simple. It taxes succession as though family businesses are static stores of wealth, rather than productive economic assets. A family farm, estate or rural enterprise is not a stock portfolio. It is a working business that employs people, purchases goods and services, generates tax receipts and invests for the future.

The Treasury assumed these changes would raise revenue. Instead, they are causing businesses to make rational decisions that reduce economic activity. CBI Economics estimates the reforms could ultimately leave the Exchequer £1.9 billion worse off. Rather than raising revenue sustainably, the policy risks shrinking the very economic activity on which future tax receipts depend.

Worse still, many businesses are now pursuing strategies that actively diminish their future value. Rather than expanding, owners are delaying projects, limiting growth plans and reducing business exposure to future inheritance tax liabilities. That is the exact opposite of what a pro-growth government should want.

The evidence is stark. A major CLA survey of 700 rural businesses found that 89% have already paused investment because of inheritance tax concerns. Nearly two-thirds have abandoned projects worth more than £50,000. More than one-third have shelved investments exceeding £150,000. Every cancelled investment represents lost productivity and lost economic growth.

The Chancellor should ask a simple question. “How could Britain possibly hope to achieve higher growth when thousands of business owners are actively reducing investment because of government tax policy?”

The reforms are particularly damaging because they misunderstand the structure of family businesses. They tend to be asset-rich but cash-poor. Their value may be tied up in land, livestock, buildings and machinery, but that does not mean they have the cash available to settle substantial inheritance tax bills. Selling the afore mentioned items would mean the business paid one bill but then closes permanently. Therefore there is no further economic activity, including employing staff and generating a profit – no matter how small, to benefit the Treasury. Do they want a one hit wonder for the now, or to invest in our country’s long-term future?

The consequences extend far beyond individual farms. Family businesses form the backbone of rural Britain. They sustain employment, support local supply chains, underpin village economies and create opportunities in communities where alternative sources of investment are often limited.

The cumulative impact is substantial. Industry analysis suggests the APR and BPR reforms could remove £15 billion from the wider economy and put as many as 200,000 jobs at risk. More remarkably, modelling indicates the policy could ultimately reduce tax revenues rather than increase them.

Collecting more tax from a shrinking tax base is not a sustainable fiscal strategy and speaks to the wider problem of short-term policies, reflective of Government term lengths and their need for votes to remain in post, rather than long term financial security for the country.

Growth does not come from redistributing existing wealth. It comes from encouraging businesses to invest, innovate, employ and expand. Tax policy should reinforce those behaviours, not punish them. This is the broader lesson the Treasury must recognise.

Reversing the family business tax is only the first step to unleashing the potential the rural economy holds. The Autumn Budget should also embrace a wider package of pro-growth measures.

The CLA's Budget submission sets out a practical package of tax reforms capable of unlocking an estimated £22.5 billion of additional economic output by closing the productivity gap between rural and urban economies. These figures are from Labour’s own Labour Rural Research Group.

Reforming the Annual Investment Allowance to include structures such as reservoirs would support food production, environmental resilience and productivity. A reduction in tourism VAT would strengthen Britain's competitiveness and stimulate growth in rural visitor economies.

The Chancellor now has a clear choice. He can defend a policy that is cancelling investment, weakening businesses and threatening jobs, or he can remove the most damaging barrier in recent history to rural growth.

Combined with the CLA’s wider reforms, scrapping the Family Business Tax and restoring full APR and BPR would not be a concession to a single sector. It would be a pro-growth, pro-investment and fiscally responsible decision – but will the Treasury rule this Chancellor too?