By Daniel Hunter

Disincentives in the current tax system are undermining the ability of family businesses to finance growth and plan for the future, says the Institute for Family Business (IFB) in a letter to the Chancellor ahead of the Budget.

Evidence shows that family businesses manage their finances prudently and are more likely to plan for the long-term than other types of private enterprise, but the IFB has identified key areas of taxation that make it harder for the sector to do that.

The family business sector represents two in three private sector enterprises and almost half of the mid-sized business sector.

The IFB has called on the Chancellor to:

· Make the corporation tax regime tax neutral and remove the bias towards debt finance.

· Improve access to non-banking sources of finance for the family business sector, by developing a bond market focused on the needs of mid-sized businesses

· Ensure that greater numbers of family firms can transfer ownership without disruption to the business by simplifying Business Asset Holdover Relief (BAHR) rules.

“We’re asking the Government to ensure family firms are not penalised through the tax system and allow their entrepreneurial spirit to thrive," IFB Director General, Grant Gordon, said.

“The Government says it wants to see a more responsible form of capitalism. We believe family businesses do just that by promoting active stewardship of their companies through the responsible management of their resources over the short, medium and long-term, but there are discrepancies in the current tax system that if addressed would enable family firms to grow faster.”

The Treasury’s bias towards debt finance means that entrepreneurial family firms funded by retained earnings have a higher cost of capital than companies that rely on debt finance. Good succession planning, which is vital to ensure that successful companies continue to prosper for another generation, is also disrupted by the current tax system.

Restrictions on Business Asset Holdover Relief (BAHR, see also appendix below) can be a disincentive for owners to pass on shares in the family firm to their heirs and therefore affect commercial decision-making. The IFB is asking the Government to simplify the overly-complex control tests for BAHR so that business owners can plan for succession and business continuity after they retire with far greater certainty.

Similarly the IFB has also called for the connected person’s rules regarding trusts altered to allow owners to settle assets on trust in the case of minors.

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