By Daniel Hunter

Proposals in the Finance Bill will make investing in private businesses less attractive by reducing the amount of tax relief that can be claimed, warns Wilkins Kennedy LLP, the Top-20 accountancy firm.

Wilkins Kennedy explains that the Government is planning to limit the amount of relief on inheritance tax bills available to entrepreneurs that have borrowed money to invest in a private business.

The Government’s proposals could add tens of thousands of pounds to some families’ inheritance tax bills, making borrowing to invest in private businesses less attractive.

Under the current system, a loan taken out to buy shares in a private trading business that is secured on a home can reduce the inheritance tax bill on that home. After the Finance Act passes, this will no longer be allowed* (see table), leaving entrepreneurs’ families exposed to unexpectedly higher inheritance tax bills.

Wilkins Kennedy adds that many entrepreneurs secure loans for purchasing business shares against their own homes as this is often the only form of security that banks will accept.

Peter Goodman, Partner at Wilkins Kennedy, says: “Many entrepreneurs who have borrowed to fund their investment in a business will now see their potential inheritance tax liability jump up overnight.”

“This change may discourage investment in small businesses, which is the last thing that the economy needs at the moment.”

Peter Goodman adds: “For many entrepreneurs, risking the family home as a security is the only way they can get funding from the banks, especially in the current lending drought. Without using a home as security, entrepreneurs will be unable to secure the funding they need to start or expand a family business, or buy into the business that they help to run.”

As a result of the changes, the Government expects to receive an extra £70m in tax receipts over the next five years.

Peter Goodman says: “When looked at in the context of the Government’s total tax income, £70m is a small amount. The changes create very little gain for the Government, but end up penalising investors in small and family businesses.”

“The changes will have a particularly large impact on farmers who buy land using the security of an investment portfolio or non-farming property. The survival of some family farms could be significantly affected for some years to come.”

Wilkins Kennedy says that the Government should only apply the rule changes to loans taken out after the Finance Bill is passed.

Peter Goodman adds: “The Government can lessen the blow these changes will cause by ensuring that they do not apply to loans to acquire interests in businesses, farmland, or family companies secured on homes prior to the Finance Bill passing.”

“If not, the rule changes will pull the rug out from under the feet of those that have already borrowed against their home to fund their business. Many individuals may well have decided to fund their business in a different way if they knew changes were coming in.”

*Under the proposals, loans to fund the purchase of business assets or shares will be deducted only from the value of what was purchased (i.e. the shares). Currently such loans can be deducted from the value of the asset on which the loan was secured — often the family home.

**Other estate assets and reliefs may apply. Businesses or shares in a trading business generally attract 100% relief from inheritance tax. Land, buildings or machinery used in a business, of which the person was a partner, or used by a company controlled by the person attract 50% relief from inheritance tax.

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