Business Property Relief might be spared by the Labour Party
This will be welcome news for family-controlled businesses following the very recent but contradictory briefing in The Times1 that suggested the relief would be abolished to pay for new spending commitments.
Under the current rules, BPR generally allows owners of family companies and other private businesses to pass on their shares to the next generation without an IHT charge. This helps to prevent the break-up of businesses on the death of a founder.
Why has BPR been in the spotlight recently?
There have been several research papers that have added to the speculation that the relief should be abolished or reduced in generosity. The IFS said in September that there was “significant scope for reforming the base for inheritance tax. Examples of ways in which this could be done include reducing or even eliminating many of the inheritance tax exemptions that exist currently.” And a further report published by the IFS suggested that “abolishing agricultural and business reliefs and bringing pension pots within the scope of inheritance tax could raise up to around £1.5 billion a year”.
The relief has grown in value in recent years which has made it more conspicuous, especially for a party that is keen to ensure tax reliefs deliver value for money. For the 2020/21 tax year £3.2 billion of relief was claimed by 3,380 estates. This was an increase of £1.3 billion since the previous tax year. Forecasting the potential impact of abolishing BPR is a difficult task however the OTS2 estimated that the extra tax raised by abolishing the relief would not be enough to fund, for example, a significant cut in the rate of IHT.
Are there any tensions?
The difficulty for whichever party takes power after the general election will be making the books add up. There are huge pressures facing public spending budgets from 2025 so any party that promises no tax rises is being economic with the truth about the state of the public finances. Whatever is promised in the manifestos will need to be treated with caution.
At this stage it is perhaps not surprising that Labour has wanted to provide some reassurance ahead of the general election. Once in office they will face a stark choice of tax rises or significant cuts to public services. They have said all tax reliefs will remain under review which might prompt reform rather than abolition of BPR. There are a number of ways in which BPR could be tightened up, one aspect of the policy that is often criticised is that BPR currently applies to AIM listed shares.
What steps if any should be taken?
It remains to be seen what, if any, reforms to inheritance tax are proposed by the Labour Party. This early it would be foolish to make plans off the back of comments in the press, however in the short-term the news that BPR is off the table provides a helpful indicator that the policy is unlikely to feature as a manifesto commitment.
In the medium-term the state of the public finances means tax rises can be expected and a Labour led Government is more likely to scrutinise tax reliefs that the wealthy make use of. In the event of reforming the scope of BPR we would expect some (albeit not much) notice and that is likely to include previously trailed items such as narrowing the trading test, reviewing the group definition, or introducing a monetary threshold to reduce the generosity of the relief. It is clearly too early to be implementing changes to group structures without a firm signal of intent from the Labour Party, however groups and shareholders taking the long view may nevertheless want to start analysing the implication of reforms and consider the potential effect on BPR claims so that they are prepared if this develops into legislative proposals.