Labour's new raid on family firms as Chancellor 'plots to charge income tax on share scheme'

Family firms have been put on high alert for a huge new Labour tax raid in the Budget. 

Chancellor John Healey could target a mechanism often used to pass businesses down to the next generation without incurring crippling costs.

Currently entrepreneurs wanting to retire can convert their holdings into 'redeemable shares', which are then bought back out of a company's profits.

The proceeds are subject to capital gains tax (CGT), which is 24 per cent for higher rate earners. But Mr Healey is said to be looking at treating that money as income instead, where the top rate is 45 per cent. 

As a result someone trying to hand down a £1million firm would face a £450,000 bill instead of £240,000 at present.

Selling businesses on the open market would still be taxed as a capital gain under the plans - which could raise hundreds of millions of pounds a year.

The Treasury refused to comment ahead of the Budget on October 28.

Labour has already faced an outcry after downgrading reliefs on inheritance tax for family firms.

Farmers protested over the charges being applied to assets worth more than £1million, forcing the Government to increase the level to £2.5million.

Businesses have also complained about the hikes in national insurance, minimum wage increases and a raft of red tape from workers' rights changes.

A consultation on changes to the tax treatment of shares was launched by HMRC in June, and closed last month. 

Shadow chancellor Andrew Griffith said: '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. 

'Labour is once again coming after the very firms that keep our local economies running.'

Accounting firm KPMG told the Telegraph it had 'significant concerns' about the impact on family businesses.