{"id":512153,"date":"2025-01-13T11:45:29","date_gmt":"2025-01-13T11:45:29","guid":{"rendered":"https:\/\/www.constructionnews.co.uk\/?p=512153"},"modified":"2025-01-13T11:45:29","modified_gmt":"2025-01-13T11:45:29","slug":"unhappy-families-the-impact-of-new-inheritance-tax-rules","status":"publish","type":"post","link":"https:\/\/www.constructionnews.co.uk\/sections\/long-reads\/unhappy-families-the-impact-of-new-inheritance-tax-rules-13-01-2025\/","title":{"rendered":"Unhappy families: the impact of new inheritance tax rules"},"content":{"rendered":"

Family-run construction firms are warning that planned changes to inheritance tax will have a \u2018seismic\u2019 impact on their businesses<\/strong><\/em><\/p>\n

Samantha was five when her dad started his housebuilding firm from scratch about 40 years ago, in the northern town where they lived. She describes him as a workaholic who \u201crisked it all\u201d, including the family home, to keep the firm afloat. Her dad died in 2022 after a short illness, leaving her in charge of what remains a major local employer, providing hundreds of jobs.<\/p>\n

Samantha (not her real name) describes this succession as \u201cbloody tough\u201d. \u201cWe\u2019d lost our leader, I was supporting my mother, and it all came down to me,\u201d she says. \u201cIt was pretty shit. There\u2019s no way of sugar coating it.\u201d Despite the personal pain, Samantha successfully took over her dad\u2019s business. But this sort of succession looks set to get tougher for family-run construction firms because of planned changes to inheritance tax rules.<\/p>\n

\u201cIf this tax comes in, it will in all likelihood mean we will actually build fewer houses because we won\u2019t have the working capital to do the same or more\u201d<\/p>\n

Keith Miller, Cavana Homes<\/h4>\n<\/blockquote>\n

Chancellor Rachel Reeves announced reforms to Business Property Relief (BPR) in last October\u2019s Budget. As a result, many previously exempt privately-owned family-run businesses will from April 2026 face inheritance tax bills (see box, below).<\/p>\n

While a similar inheritance tax rule change falling on farmers may have dominated national headlines, family-run construction firms have also warned of the massive impact ending BPR will have on their businesses. They say the windfall tax they face will stump growth and cut outputs, such as the new housing the government wants.<\/p>\n

\u2018Hopping mad\u2019<\/h3>\n

Family-run firms tell CN<\/em> that the change will impact their operations now and not just in the future when the tax bill is passed on. They\u2019re concerned it will deter family-member shareholders from investing in the company or force them to take cash out of the business to prepare for the tax.<\/p>\n

\u201cFamily-run construction firms have got to think about how they plan succession and how they can afford to pay the tax when it becomes due,\u201d says Wates board member James Wates. \u201cDoes that mean I invest in the business? Or do I have to take some money out to protect myself for the future? Is there any point in growing the business? Because the more I grow, the more tax has to be paid by the next generations.\u201d<\/p>\n

\u201c[Businesses will] likely be snapped up by private equity and bigger competitors. The uniqueness that comes with our businesses being in the community\u2026 will go\u201d<\/p>\n

James Wates, Wates<\/h4>\n<\/blockquote>\n

Stuart Jones, managing director of Ridgway Rentals, a hire firm set up by his grandfather in the 1960s, describes the tax changes as \u201ca cloud hanging over the family business\u201d. He adds: \u201cYou place your profits in the business because you want it to be strong, but [the tax] will alter how family-run construction firms invest.\u201d Jones expects more than 10 years will pass before the firm is passed on, but adds that slashing BPR would still be damaging, even if it is reinstated later on.<\/p>\n

Jeremy Cavanna, a non-executive director of 101-year-old Torbay-based Cavanna Homes, is \u201chopping mad\u201d about the proposed changes. He says family shareholders had been happy to reinvest post-tax profits into the business, but now face a significant inheritance tax liability in doing so. \u201cBPR has been fundamental to the family construction business and [the proposed tax] has broken the virtuous circle which family companies operate in.\u201d<\/p>\n

Cavanna Homes had plans to grow its output and turnover from around 250 homes a year and \u00a365m respectively to 350 homes and \u00a3100m a year. But its chair Keith Miller says the looming BPR changes will \u201cstump our growth\u201d.<\/p>\n

\u201cIf shareholders stop reinvesting profit due to the risk of BPR then we will not be able to do this in future,\u201d Miller says. \u201cIf this tax comes in, it will in all likelihood mean we will actually build fewer houses because we won\u2019t have the working capital to do the same or more.\u201d<\/p>\n

\u2018Seismic\u2019 impact<\/h3>\n

How many family firms will be caught by the changes? Wates, who also chairs advocacy group Family Business UK (FBUK), says the impact of the tax change would be \u201cpretty seismic\u201d.<\/p>\n

\u201cThere are many, many, family businesses in the construction sector, like [Sir Robert] McAlpine, Willmott Dixon, Bowmer & Kirkland and Wates,\u201d he says. \u201cThey are all now very much in the frame for a tax that they\u2019ve not had to think about for a very long time.\u201d<\/p>\n

\u201cIf your estate doesn\u2019t have the cash to pay the tax, it will have to be paid out of the company. That is disastrous for family companies.\u201d<\/p>\n

Stuart Jones, Ridgway Rentals<\/h4>\n<\/blockquote>\n

As well as these major family-run firms, there are many small and medium-sized businesses that are likely to be affected. Exactly how many, nobody seems to know.<\/p>\n

According to the government, 81 per cent of construction SMEs are family-run. The Construction Plant-hire Association, which says the \u201cvast majority\u201d of the 3,000 companies in its sector are family firms, describes the proposed tax change as \u201cmanifestly unfair and poorly thought out\u201d. Ridgway\u2019s Jones says many of his peers will be caught by the tax. \u201cA 20-tonne excavator is now about \u00a3150,000 so you only need 10 of those to have a business worth [more than] \u00a31m,\u201d the new threshold for BPR, Jones adds.<\/p>\n

CN<\/em> asked the Treasury how many family-run construction firms would be affected by the changes. It did not provide figures but said in a statement that only 158 estates had benefited from BPR in 2021\/22 and that the \u201cmajority of estates\u201d will be unaffected by the reforms.<\/p>\n

\u201cOur commitment to business is resolute,\u201d it adds. \u201cWe have capped Corporation Tax at 25 per cent, confirmed full permanent expensing,
\nand are committed to working together with business to unlock more growth opportunities for our country.\u201d<\/p>\n

A \u2018bloody battle\u2019<\/h3>\n

All the families CN<\/em> spoke to say the planned change to BPR has come as a shock, given how much construction firms are struggling.<\/p>\n

Miller describes the housing market in the South West as a \u201cbloody battle\u201d. \u201cWe have had to deal with Brexit, elections and Liz Truss smashing the economy,\u201d he says. He adds that the increase in employers\u2019 National Insurance contributions, also announced in the Budget, will add \u00a3120,000 to his firm\u2019s wage bill.<\/p>\n

Samantha says her firm is still struggling with the planning system and the \u201cskyrocketing\u201d cost of land and materials. \u201cIt feels like Keir Starmer has gone into a room with his trusted advisers and asked, \u2018what\u2019s the worst thing we can do for construction?\u2019\u201d<\/p>\n

After decades of building up the family business, some owners may even decide to sell up rather than burden their children with big tax bills on their death.<\/p>\n

Many family members plough much of their spare cash into the business, leaving little free to pay a big tax bill, says RSM private client tax advisor Peter Budden. \u201cThey put all their eggs in one basket. It\u2019s almost like another child. They do want to hold onto it for as long as possible. But now they are saying: \u2018how would I fund that liability?\u2019\u201d<\/p>\n

Wates says owners of family-run businesses hope their children will take on, grow and develop their firms. He says: \u201cIf those children are going to be landed with a massive inheritance tax bill, why would you do it?<\/p>\n

\u201cWhat is likely to happen is that more businesses will be sold. They\u2019ll be snapped up by private equity and bigger competitors. The uniqueness that comes with our businesses being in the community and working with people will go.\u201d<\/p>\n

Samantha says she would have \u201cseriously considered\u201d ceasing business if her dad\u2019s firm had been subject to inheritance tax when he died. \u201cIf it was a really rosy picture out there for housebuilding it might be a different conversation,\u201d she says. \u201cBut we\u2019re not in fairytale land.\u201d<\/p>\n

Preparing for change<\/h3>\n

Lawyers and tax advisers tell CN<\/em> that many family-run firms have begun planning for the tax. Ben Taylor, a senior associate in private and corporate tax at law form Roythornes, says firms could minimise exposure to the tax by \u201cfracturing\u201d ownership between family members. \u201cBut this needs to be properly thought through,\u201d he says. \u201cIt is important to consider how [changing ownership] will affect voting and control, and whether asset protection is a concern. Financial difficulties can put shareholdings at risk.\u201d<\/p>\n

While family members could use dividends to pay inheritance tax bills, such payments would attract separate tax charges at rates of up to 39.4 per cent. This would mean family members taking out a significant amount more than the inheritance tax they owed to cover the dividend tax, says RSM head of construction Stacy Eden. \u201cYou might have to [extract] a significant amount more than a \u00a31m inheritance tax \u2013 maybe \u00a31.6m to pay it.\u201d<\/p>\n

All the family businesses that CN<\/em> spoke to feel it is unfair to treat their businesses as personal wealth. Jones says: \u201cIt\u2019s only a family business tax, it is not going to impede the big corporates \u2013 how is that fair?<\/p>\n

\u201cAnd if your estate doesn\u2019t have the cash to pay the tax, it will have to be paid out of the company. That is disastrous for family companies.\u201c<\/p>\n

Wates says FBUK warned the Treasury about the importance of keeping BPR in the run-up to the Budget but hit a \u201cblank wall\u201d. \u201cThey didn\u2019t want to listen to us,\u201d he says. \u201cBut this is the first skirmish in a long battle. The case for BPR is so sound that we have to ensure that even if this government [removes it], a future one will bring it back.\u201d<\/p>\n

\n

Business Property Relief reforms<\/h3>\n

Business Property Relief was introduced in 1976 to ensure family businesses survived after an owner\u2019s death without having to be broken up to pay inheritance tax.<\/p>\n

The tax relief applies to privately owned family firms that meet certain criteria. These businesses benefit from up to 100 per cent relief from inheritance tax.<\/p>\n

Under the proposed changes, which would kick in from April 2026, only the first \u00a31m of the value of a family business will be completely exempt from inheritance tax. The remaining share of the business will be subject to a 50 per cent relief, meaning beneficiaries will pay 20 per cent, rather than the 40 per cent levied on a personal estate. The tax can be paid in instalments, with the first due six months after the person has died.<\/p>\n

As an example, family members who inherit a \u00a350m construction business will pay inheritance tax at a rate of 20 per cent on \u00a349m. This would leave an inheritance tax bill of \u00a39.8m.<\/p>\n

RSM private client tax advisor Peter Budden says an issue with the proposed changes is that the value of the business is determined at the point of the owner\u2019s death. \u201cThis is one of the nuances which not everyone realises,\u201d he says. \u201cThe value of the company might not be anything like what it was prior to death. In some businesses, owners have very little input, but in others the owner is the business and has all the relationships. In such cases, you might expect a larger differential in the value before and after death.\u201d<\/p>\n

Budden adds that the new charge will deter owners from holding onto shares or maintaining control of the business in other ways. \u201cThis changes the playbook in terms of [business] planning,\u201d he says. \u201cIt\u2019s a very different framework.\u201d<\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Family-run construction firms are warning that planned changes to inheritance tax will have a \u2018seismic\u2019 impact on their businesses Samantha was five when her dad started his housebuilding firm from scratch about 40 years ago, in the northern town where they lived. She describes him as a workaholic who \u201crisked it all\u201d, including the family …<\/p>\n","protected":false},"author":124451,"featured_media":512186,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"ep_exclude_from_search":false},"categories":[79553,559],"tags":[],"yoast_head":"\n\n\n\n\n\n\n\n\n\n\n\n\n\t\n\t\n\t\n\n\n\n\n\t\n\t\n\t\n