David Ho
Thistle Seafoods has been a family business for generations
Farmers dominated the debate over the recent Budget's inheritance tax change – but the issue is much bigger than that. Family businesses are affected in the same way, and there are many more of them.
As the consequences sink in for many of these families, warnings are being heard of lower investment, lower employment, lower growth and a potential takeover of a vital part of the economy by large companies, often foreign.
The change comes from the chancellor's decision to tax assets as they pass from one generation to the next.
For most people, this tax applies to assets worth more than £325,000, or £500,000 if the family home is being passed on.
But for farmers and businesses, passing assets from one generation to the next is currently tax-free – and this tax relief is unlimited.
Chancellor Rachel Reeves plans to exempt the first £1 million of agricultural or commercial property. After that, it will be taxed at 20%, or half the rate of inheritance tax charged on others.
It's unclear exactly how many farmers this would affect. The Treasury estimates 500 per year; The National Farmers Union says the figure is closer to 70,000 in total.
At least part of this large difference can be explained by the fact that farmers also claim business property relief when their assets are devoted to a non-farming activity, such as holiday lets, a farm shop or a mail order business.
The number of non-agricultural businesses affected by this measure is more difficult to assess, but a rough estimate indicates that it could be around 20 times higher.
Scotland does not have as many medium-sized family businesses as other economies.
But in certain sectors, they play an important role – notably that of the agri-food sector. Well-known brands such as Tunnock's, Baxter's of Fochabers and Walker's Shortbread are among the biggest.
One reason you may not have heard such a strong backlash against the new inherited wealth tax is that it's just that: inherited wealth. These families don't get much sympathy for their tax breaks…or at least, not as much as the farmers.
The Grant family, distillers of Glenfiddich whisky, are estimated by Forbes magazine to be worth around £2.9 billion. Inheritance taxes on the transfer of this wealth are currently zero. In the future this could be worth £580m.
Some sectors warn that forcing families, in some cases, to turn a fifth of their assets into cash needed to pay HMRC, could have unintended consequences.
Mark Anderson, Managing Director of GAP (middle) with other family members working in the business
As with farmers, many of these businesses are capital intensive, but do not generate significant income.
One of the sectors affected is the rental and operation of facilities – trucks, excavators and many other equipment needed in construction and other sectors, including agriculture.
Family businesses make up 85% of the 350 members of the Scottish Plant Operators Association. Factory leasing has not been affected to a large extent by consolidation into larger companies.
Requiring significant and costly capital expenditure, it is hit hard by a tax that targets the value of assets rather than their profitability. The new tax regime will not take into account the ability of companies to raise cash to pay.
Former SPOA chairman Mark Anderson is chief executive of GAP, the fourth largest factory rental operator in Britain.
Based in Glasgow, she is now in the third generation of the family. Mark's father and uncle are past retirement age, but still work within the company.
The company has 2,200 employees. The most recent annual turnover reached £340 million.
GAP is the fourth largest equipment hire operator in Britain
Mark says companies like his can be loyal to their workers and make long-term decisions, despite the ups and downs of the business cycle. Several staff members have 40 years of experience, while two have over 50.
If the company were publicly traded or owned by a private equity fund, it would be under pressure to deliver results in the short term.
“Some of our assets take 10 years to generate a return. These are assets that private equity won't invest in because they don't get a return after a year,” he says.
Mark loves his job and loves the people he works with.
“I have two daughters and I wonder if, in the future, this is something my daughters would want to get into.”
The transfer of power between his daughters is still a long way off since they are only five and ten years old.
But since the budget three weeks ago, succession planning has become a major source of uncertainty and future costs for companies like GAP.
Ryan Scatterty
Ryan Scatterty says seafood industry is dominated by family businesses
There are ways to avoid the tax using existing loopholes. The main way is to gift assets to the next generation, provided you live seven years after the transfer.
Companies seeking to limit their tax exposure face grisly judgments about the life expectancy of their oldest members – or to insure against the death of younger members, who could defy tax planning. They died young.
In many cases, such as the Grant family of distillers, the wealth is shared among siblings and cousins. As assets are passed on to the next generation, the tax bill could be slightly lower due to the £1 million exemption per person.
But the need to raise cash could force some family members to sell a stock, which could destabilize the business.
Ryan Scatterty is managing director of Thistle Seafoods near Peterhead and represents the fifth generation of the business. It also has a processing unit in Uddingston, Lanarkshire, employs 800 people and has a turnover of £133 million.
He says the seafood sector is dominated by family businesses who find themselves in a similar situation to farmers in the north-east of Scotland protesting against inheritance tax proposals.
He says recipients are unlikely to have the money to pay HMRC, even with 10 years of payments.
“The only way to do this is to sell the company. It could be to a large multinational, which could be foreign-owned, and without that commitment to the local community,” he says.
“The question for the government is: does it want these sectors to belong to giant multinationals?”
He also claims that the change in inheritance tax discourages investment. If an investment were to increase the value of a family business by £10m, he estimates the 20% tax bill at death might no longer make it look financially viable.
Reuters
Rachel Reeves
Paul Andrews, founder of Family Business United, says his members were shocked by the budget.
“This has sparked a lot of discussion around succession. The unintended consequences will be a reduction in investment,” he says.
Another membership organisation, Family Business UK, says it has been “inundated” with requests for membership and advice.
The Treasury says that Rachel Reeves made the choice to raise taxes both to stabilize public finances and improve public services, and that her tax choices were intended to impose an additional burden on businesses and the wealthy.
When tax revenue is needed, it is easier to obtain it from deceased relatively wealthy people rather than from taxes on the income or consumption of people with modest incomes.
Chris Campbell – a tax specialist at Icas, the Institute of Chartered Accountants in Scotland – says his members have been busy this month with advice efforts.
Companies hope that pressure from farmers could lead to a policy change.
“They have to rethink, but they are also waiting to see,” he says.
“There is no indication of a turnaround, but the reaction of farmers could have an influence.”
