New inheritance rules will hit business owners - financial expert

A financial expert has warned that inheritance changes introduced in the Labour Budget have sparked significant concerns for business owners, particularly those running small and family businesses.

Mike Jordan (pictured), founder of Jordan Financial Management, said changes to Business Property Relief (BPR) could have far-reaching implications for both business continuity and the financial security of the owner’s family.

Mike said: “There has been so much coverage over the impact on Inheritance Tax changes on farmers that many have overlooked the changes to BPR – which will affect the tax bill families face after the death of a business owner.

“It’s vital that businessowners understand this now, so that they can plan ahead.”

Mike said that BPR could impact in a number of ways – from dealing with the initial inheritance tax bill to challenges for the next generation who may want to continue to run the family business.

He said: “For example, HMRC values a business at six times its annual profit, which is how it calculates the Inheritance Tax due. However, this doesn’t take into account that, after the death of an owner or founder, the value of a successful business can drop significantly.

“Also, this valuation does not account for the practicalities of selling the business or its sustainability without the owner; it is purely based on the profits generated while the owner was alive.

“This scenario can be devastating. The family not only loses the primary breadwinner but also inherits a tax burden that far exceeds the value of the business.

“Without careful planning, this could lead to the forced sale of other family assets, such as their home, or even bankruptcy.”

Mike also warned that if a family needs to issue dividends to help cover Inheritance Tax, they would also have to pay Income Tax on them, increasing the burden further.

Ultimately, he believes these tax changes will make it much harder for the next generation to carry on the business after the death of a founder.

He explained: “Many small businesses will not have the liquidity to pay these substantial tax bills.

“Borrowing money is a common solution, but securing a loan in the wake of the owner's death can be incredibly difficult - in fact most likely impossible. Banks are unlikely to lend large sums to a business facing leadership uncertainty.

“That means that if there is a son or daughter who has been learning the ropes ready to take over the family firm, they face huge challenges just to rebuild a business that has been built up over years of hard work.

“This is clearly a very poorly thought through policy which appears to be aimed at punishing business owners rather than helping the economy.”

Mike advises that business owners get independent financial advice, develop a Business Inheritance Tax Plan, and look into how Life Insurance could help cover the costs of Inheritance Tax.

He said: “Planning ahead could mean the difference between preserving your family’s financial stability and seeing your hard-earned business assets not only eroded by tax obligations but also your personal assets having to be sold by your family to cover the inheritance tax liability on your business that is now, post-death, worth relatively little.”