Key facts
- The proposed changes could almost double the cost of passing companies from parents to their children.
- Current rules allow business owners to use redeemable shares to attract capital gains tax at 24% for higher-rate payers.
- The new proposals could mean a business owner paying up to 45% income tax on a £1 million business transfer.
- These changes come on top of Labour's inheritance tax changes affecting family businesses and farms, expected to raise £300 million annually.
- Accountants warn the plans could discourage succession planning and force owners to sell their businesses.
Chancellor John Healey is reportedly considering plans to tax the transfer of family businesses as income rather than capital gains, a move that could almost double the tax bill for owners. The proposals, being examined ahead of the Autumn Budget on October 28, would affect entrepreneurs looking to retire and hand down their companies to the next generation.
Currently, business owners can use redeemable shares to attract capital gains tax, charged at 24% for higher-rate payers, instead of income tax at 45%. Under the proposed changes, an entrepreneur handing down a £1 million business could face a tax bill of £450,000, compared with £240,000 under current rules. This comes on top of Labour's inheritance tax changes, which are expected to raise £300 million annually.
HMRC consulted on the proposals over the summer, with the consultation closing in mid-September. Accountants have warned that the plans risk discouraging succession planning and could force owners to sell their businesses. The Chancellor is reportedly seeking to address a potential £35 billion fiscal shortfall.