There have been a lot of articles in the national press recently about the tax changes that will affect farmers from the new financial year.

These changes will stop them from passing their farm on to their children free of tax, and the tax bill that they will incur after the deadline would in many cases mean that the farm has to be sold in order to pay HMRC. Farmers are distraught at the prospect of losing a farm that has been in their family for generations.

Impact on estate agencies

So how does this affect estate agencies? Well, the same legislation that affects farmers will affect all other family-owned businesses.

Rather than just inheriting a business, your children will now need to find the money out of taxed income to pay a huge tax bill on their inheritance if its value is above the threshold. The consequence of this will be that many family businesses will end up being sold.

I have already seen the impacts of this legislation in my business. Since the tax changes were announced we have seen a huge increase in the number of family-owned businesses that have been sold including Manning Stainton, Chancellors and many smaller businesses, one of which had been owned by the same family for five generations.

The tax changes are short-sighted and will almost certainly be counterproductive.”

In my opinion the tax changes are short-sighted and will almost certainly be counterproductive. I’m not going to try to pretend that all family businesses are run better than corporately owned ones. This is simply not true. However, from a purely tax perspective, forcing families to sell their businesses prematurely will prove to be a terrible mistake.

There are many reasons for this. Firstly, family-owned businesses are often run as partnerships or LLPs which are less tax efficient than limited companies.

Secondly, they tend to invest less money in proptech, so they employ more staff – all of whom pay tax on their salaries.

Thirdly, their profits are not reduced by interest payments made to a private equity owner, so they tend to pay more corporation tax.

Lastly, when they are eventually sold, they will usually pay capital gains tax in the UK as opposed to the capital gain being made offshore.

No going back

I would like to believe that if the new tax rules do not raise any money they will be reversed, but sadly this doesn’t usually happen. The reason for this is that changing the rules back again would lead to articles about tax breaks for millionaires which would be politically unacceptable, so once the legislation is passed it is unlikely to be rescinded.

So, if you own a family business, what can you do?

There are really only two options. You can pass your business on to your children sooner. So long as you survive for seven years, no tax will be payable. However, the risk with doing this is that if your children are given the business too soon, they may not have the maturity or the business skills to run it effectively. Indeed, they may be established in other careers and not want to run the business.

The only other option is to sell the business.

As a business sales broker, I expect to benefit from these tax changes. However, this doesn’t stop me from believing that they are wrong and that they will be detrimental to the national interest.