Business leaders fear that Westminster’s abrupt overhaul of inheritance tax will leave family‑run firms facing crippling bills and stalled growth, says Sara Thiam.

Family-owned businesses are the backbone of communities across Scotland. The top 100 include some of our favourite brands and largest exporters, they are rooted in our regional economies and together generate £22 billion in economic value each year, equivalent to 10 per cent of the Scottish economy. But some of these firms now find themselves on the brink because of decisions made in Westminster. 

For decades, families were able to pass business control between generations because qualifying assets (such as working farms or business property) were exempt from inheritance tax. However, Rachel Reeves’s first budget capped the threshold for 100 per cent relief on combined business and agricultural assets at £1 million, with inheritance tax set at 50 per cent above that. A backlash from affected groups prompted Keir Starmer and Ms Reeves, the chancellor, to rush out an announcement just before last Christmas which increased the cap on reliefs from the original £1m to £2.5m (per person). 

In effect, married couples can shelter up to £5m of assets tied up in agricultural and business property from inheritance tax. But Scotland’s family firms say that this U-turn provides only modest respite and has not allayed their fears ahead of the April 6 deadline when the cap comes into effect. 

Why is this a problem? After all, as Ms Reeves would say, residential property and shares in listed companies are subject to inheritance tax. And when the Treasury has to balance the books, cracking down on tax reliefs where the biggest beneficiaries are the wealthiest estates seems an obvious way to go about it.  

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First, even the combined upper limit of £5m is not enough to stop many family firms facing potential eight-figure inheritance tax liabilities. Family firms are cash rich but asset poor. If business or agricultural property stay within the same family, there is no cash generation and paying inheritance tax on illiquid assets undermines the entire operating model of family firms. This means money that would have been invested in wages, skills and productivity is no longer available.  

This has ramifications beyond individual businesses. As many as 16,000 jobs in Scotland are at risk, making us all collectively poorer by £1.2bn in lost economic output, according to analysis from CBI Economics. I recently spoke to one major west of Scotland employer, which was founded by now very elderly family member, which fears the worst and has already reduced tooling, plant, automation and product development.  

Footing the bill presents some unpalatable decisions. Mark Anderson is managing director of the Glasgow-based GAP Group – the UK’s largest independent plant hire firm. He has warned in these pages that the changes “threaten to push family-run businesses like ours to the brink of collapse” with companies scaling back on hiring and investment, ensuring that they have adequate cash reserves to meet their new inheritance tax obligations.  

A small business in East Lothian contacted me to warn that their expected inheritance tax bill, spread over 10 years, was greater than their profits in each of the last two years – resulting in “no prospect of profit for a decade”. 

Families do have a last resort: selling up. But local ownership is then lost and decision‑making moves away; particularly grating for families as institutional or overseas buyers do not face similar succession pressures. While family‑owned firms typically reinvest, protect skilled work, and preserve heritage, foreign owners tend to focus on maximising shareholder returns. It is clear that this policy is bad for business and bad for the economy overall. 

The panic faced by many family firms comes from the lack of any notice or warning. One rural business owner recently told me that “the shock announcement with no consultation knocked the stuffing out of me — it felt unthinkably cruel”. Family firms suspect that the lack of dialogue was from the Treasury’s preoccupation in making the sums add up for the Chancellor’s fiscal rules, rather than any interest in meaningful tax reform. 

And it is not only the Treasury that has form in making significant policy changes out of the blue. In the last Scottish budget, finance secretary Shona Robison unexpectedly removed shooting and deer forests from eligibility for the small business bonus scheme, which will damage some rural firms. On top of that, the Fraser of Allander’s Scottish business monitor shows only 11.5 per cent of companies believe that the Scottish Government effectively engages with the private sector. 

The relationship between government and private sector firms is clearly a problem both north and south of the border. When economic growth is meant to be a top priority at Westminster and Holyrood, this is particularly concerning. Private enterprise is essential to the competitiveness of our economy and the tax revenues we need to fund better public services.   However, the ability of family firms to take risks, expand and prosper is being undermined by sudden adjustments to their tax regime. 

Lower growth weakens our already stretched public finances. The official economic forecaster the Office for Budget Responsibility estimated that setting the relief threshold at £1mn could raise around £1.8bn to the Exchequer by 2030. But analysis by CBI Economics suggests that the government could actually lose that amount of revenue, as firms cut back on investment and jobs. 

The chancellor risks creating a “lose-lose” situation. The economic hit from the changes is already palpable. But by the Treasury’s own reckoning, the increase in thresholds will reduce the potential tax base and therefore the revenue to be collected. 

What should the government do to fix this problem? The planned implementation this April should be paused, pending review. Reforms can then be designed in consultation with industry which supports the chancellor’s ambitions to close tax loopholes, while mitigating any negative consequences and safeguarding family ownership of businesses. 

These could include deferral of the tax until a sale or change of control and creating new allowances to avoid the risk of double taxation. The Treasury also needs to provide clarity on whether the spousal allowance is transferable when a spouse has died. 

Benjamin Franklin, one of the signatories of the US Declaration of Independence 250 years ago, wrote that "nothing can be said to be certain, except death and taxes". Family businesses know all about passing responsibilities from generation to generation - and governments must ensure that their taxes do not make this harder and undermine businesses, workforces, communities and our economy.  

Sara Thiam is chief executive of Prosper, a cross-sector membership think tank that aims to strengthen Scotland's economy

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