John Healey has reportedly drawn up plans for a tax raid on family businesses ahead of his first Budget, as he scrambles to avoid spending cuts.
The Chancellor is considering proposals to levy income tax when business owners hand their company down to their children, potentially almost doubling the tax bill, according to a report in the Telegraph.
Under current rules transfers can be structured in a way that allows them to attract capital gains tax which is charged at a lower rate.
The plans would hit entrepreneurs preparing to retire, with accountants warning Healey’s plot could drive many family businesses into “extinction” and discourage new companies opening their doors.
The Treasury is looking to raise hundreds of millions on top of Rachel Reeves’ raid on family businesses through inheritance tax (IHT). The previous Chancellor’s crackdown is expected to generate £300m a year.
Turning off the tap
Healey is mulling whether to shut off a possible route of handing down a business that owners frequently use upon retirement to prevent a substantial one-off tax bill.
Instead of selling the family firm to the next generation, partners convert holdings into ‘redeemable shares’ which the business can buy back using its own profits.
This move attracts capital gains tax (CGT) which is charged at 24 per cent for higher-rate taxpayers, compared to 45 per cent on income tax.
Cutting off the CGT route of handing down a company could lead to a swelling tax bill, while selling on the open market still leaves the business exposed to being taxed as a capital gain.
Business owners are already feeling the effects of a wave of red tape introduced under the workers’ rights changes introduced by Angela Rayner alongside minimum wage increases and soaring energy bills caused by the conflict in the Middle East.
The Telegraph reported the changes are likely to be presented by Healey as a stricter approach to tax avoidance rather than a raid, but many firms will look to dodge the tax by selling or using other complex ways to hand down their businesses.
Healey’s headache
Healey is facing a fiscal headache in his maiden Budget on 28 October, as he looks to raise revenues to offset the blow of rising interest rates and defence spending.
Economists have forecast that Healey’s headroom, which sat at £23.6bn in March, has shrunk in the wake of the conflict in the Middle East. The Institute for Fiscal Studies (IFS) warned that he faces a £35bn blackhole in the government’s spending plans.
Downing Street has sought to play down chatter around tax rises, amid widespread industry warnings they would harm further economic growth – particularly following the rampant speculation and briefings ahead of the last Budget.
Healey is poised to launch an attack on high-street banks despite warnings from sector heavyweights it could send mortgage rates spiralling and worsen the cost of living crisis.
He is also expected to announce a new tax on gambling machines, which is anticipated to raise £500m.
But Healey has reportedly ruled out raising CGT to the same levels as income tax, after warnings that it would harm Britain’s appeal to investors.
Rumoured proposals under consideration by the Treasury suggested ministers could align CGT rates with income tax rates of 20 per cent, 40 per cent or 45 per cent.