Inheritance tax changes undermine family businesses, warn MPs

Susan Murray (Lib Dem), who secured the debate, began her speech by emphasising the vital role of family-owned businesses in the UK economy, saying they contribute over £200 billion in taxes annually. She suggested that family-owned businesses are in “turbulent and uncertain times” and taxation is now the “No. 1 concern facing Scottish businesses”.

Murray provided examples of family businesses in her constituency which are facing challenges, saying “when government policies are hostile to their success and survival, their ability to create jobs and grow the economy is eroded and their future is uncertain”. She believed that changes to business property relief (BPR) and agricultural property relief (APR) limit estate planning opportunities for family businesses.

The Lib Dem MP raised concerns about the implications of the inheritance tax changes, asking the minister to clarify whether a consistent and defined method exists for valuing companies for IHT purposes, warning of potential inconsistencies and disputes. She stated: “When a family business owner dies and leaves shares to the next generation, there is no cash available to pay inheritance tax liability and no windfall to successors. In practical terms, it is business as usual, and the business continues to use its assets to trade and contribute economically to the local community. It is not the same as selling a business; however, it may force the company to be sold completely to pay the liability”.

Jim Shannon (DUP) intervened, suggesting that taxing businesses at 20% on their value at the owner's death ignores the owner's personal input into the business, and leaves a situation that can potentially “run a successful business into the ground”. He warned that “There is only so much that one person can be taxed before the burden is too great”.

Graham Stinger (Lab) cited the Confederation of British Industry, which estimates that the proposed changes to BPR will cost the government nearly £1.9 billion. He asked if the government should have a consultation that looks at the impact on tax and local family businesses before they went ahead with changes.

Another Labour MP, Graeme Downie, recognised the government’s right to ensure that there is enough funding to pay for public services through tax changes. However, he suggested that one option might be to allow businesses to pay inheritance tax if the business is passed on to another family member, so that the tax liability is still met, without harming the business’s future.

Alistair Carmichael (Lib Dem) said that at present valuations for BPR are based on book value—which can very often differ from actual market value. He stated: “That being the case, I wonder how easy it would be for the government to have reached any reasonable understanding of the actual value of the assets that they now seek to tax.”

Murray reiterated that the inheritance tax changes affect modest family businesses, not the ultra-wealthy or global conglomerates. These family enterprises—often the largest employers in their areas—frequently exceed the £1 million relief cap due to land and equipment values. She added that, unlike big firms, they can't “offshore ownership structures or use complex tax arbitrage to avoid the costs”.

The Lib Dem MP called on the government to consider raising the relief cap to £2 million, as proposed by the Scottish Chambers of Commerce, to protect more family businesses and local jobs. She criticised the lack of an impact assessment, and asked if the minister would consider amending the proposed legislation to ensure that the changes do not weaken genuine family businesses, and make the transfer of shares in a family business to the next generation exempt from inheritance tax for seven years, provided that the business is not sold in that period. If the business is sold within those seven years, both IHT and capital gains tax would then become payable, funded from the sale proceeds, she added.

The Exchequer Secretary, James Murray, responded to the debate for the government. He acknowledged MPs’ concerns but emphasised that while the reforms reduce the inheritance tax advantages available to owners of agricultural and business assets, those assets would still be taxed at a much lower effective rate than most other assets.

The minister said that the government will do everything to support businesses to grow, including by overhauling the UK’s regulatory system to reduce burdens on businesses by 25% by the end of this Parliament. He claimed that when the government were deciding how to reform APR and BPR, they made sure that “generous tax reliefs still existed in the tax system” to continue to support small and family-owned farms.

The minister also emphasised that, under the reformed system, estates will still benefit from 100% relief for the first £1 million of combined assets from April 2026, and on top of that, there will be an uncapped 50% relief on further assets. That means that inheritance tax will be paid at a reduced effective rate of up to 20%, rather than the standard 40%. Those reliefs sit on top of the standard nil-rate bands and other exemptions, such as transfers between spouses and civil partners.

Susan Murray intervened and asked the reason the government does not consider taxing large digital multinational corporations to raise the extra revenue that is being raised from this measure, “which effectively punishes the businesses that run the supply chains that export to those markets”.

The minister responded that the government are committed to maintaining the digital services tax until the pillar 1 international solution is implemented, adding that large multinational firms are well dealt with on the international level.

On the impact of inheritance tax policy, the minister said the reforms are expected to impact around 1,500 estates claiming only BPR, with about 1,000 of these estates holding shares not listed on recognised stock exchanges. However, three-quarters of estates claiming business property relief, excluding those holding unlisted shares, will not see an increase in inheritance tax in 2026-27. He continued that the Office for Budget Responsibility does not anticipate significant macroeconomic impacts from these reforms, which are projected to raise £520 million by 2029-30. The minister concluded the debate by suggesting that “our approach is a fair way to balance supporting farms and businesses with fixing the public finances, so we stand by our reforms”.

You can read the full debate here.