The government’s move to limit inheritance tax relief for family-owned businesses could cost Britain roughly 125,000 jobs and significantly reduce economic activity, new research has found.
The change unveiled in Labour’s first Budget could reduce the value of goods and services produced across the UK economy by £9.4bn and incur a £1.3bn net loss for the Treasury between 2026/27 and 2029/30, according to a study by CBI Economics.
The latter figure contrasts with a £1.4bn gain in revenues estimated by the Office for Budget Responsibility over the same period from the change to business property relief (BPR).
BPR allows assets of privately-held firms and shares in companies listed on London’s junior stock market AIM to be passed on free from inheritance tax.
Chancellor Rachel Reeves announced in the Budget on 30 October that business assets over £1m would be charged 20 per cent inheritance tax from April 2026, half the standard rate. The first £1m of assets would remain exempt from inheritance tax.
The new research, commissioned by non-profit group Family Business UK (FBUK), predicted around 5,000 family firms with assets valued at more than £1m were expected to change hands between 2026/27 and 2029/30.
Its survey of 234 family businesses found that owners were most likely to mitigate the additional tax liability by downsizing, cutting investment or reducing staff numbers.
The study projected an average reduction of 16.5 per cent in investment, 10.2 per cent in headcount and 7.4 per cent in turnover.
Other measures floated by these owners include 15 per cent saying they would sell the entire business and four per cent either closing, liquidating or moving overseas.
Researchers also found that among business owners currently below the £1m threshold, 55 per cent expected to reduce investment by a net average of 12.2 per cent, while predicting a 5.8 per cent fall in turnover as they look to mitigate future impacts from the higher tax liability.
The findings constitute just the latest of economists’ gloomy takes on the Budget, alongside forecasts of higher-for-longer interest rates and inflation. Labour said it raised taxes by £41bn per year to shore up Britain’s public finances and avoid a fresh period of austerity.
Elsewhere, Reeves’ plans to charge 20 per cent inheritance tax on agricultural estates over £1m caused thousands of farmers to protest in Whitehall last month. They argued this change to agricultural property relief (APR) would force them to sell up to be able to pay the tax.
FBUK said that, like farmers, family business owners typically have more than 90 per cent of their personal wealth directly tied up in the firm.
The group added that owners would effectively face “double taxation” as many would be forced to take out cash from the business using dividends, which are taxed at 39.5 per cent for additional-rate taxpayers.
“There’s a fundamental misconception that family business owners are hugely wealthy individuals, with large quantities of liquid assets or cash,” said Neil Davy, FBUK’s chief executive. “Nothing could be further from the truth.”
Davy argued that the changes to BPR “will fundamentally remove incentives among owners of family firms to invest in their businesses and in many cases threaten their viability”.
“Given a typical business will employ more people than an average farm, there’s a case to make that capping BPR may be even more damaging to the employment figures and the wider economy than capping APR,” he added.
A source close to the Treasury said it expects roughly two-thirds of annual BPR claims to be for AIM shares, which have retained a 50 per cent inheritance tax break.
A Treasury spokesperson commented: “Our commitment to business is resolute. We have capped corporation tax at 25 per cent, confirmed full permanent expensing and are committed to working together with business to unlock more growth opportunities for our country.
“With our public services crumbling, a £22bn inherited fiscal black hole and only 158 estates benefitting from over half a billion pounds in business property relief in 2021/22 – more than half the total value – we had to make difficult choices to fix the foundations of the country and restore economic stability so businesses can thrive.”