The potential scrapping of inheritance tax relief could impose a £1.4bn annual burden on thousands of family businesses, industry experts warn, as fears mount over Labour’s possible tax reforms.

Family Business UK (FBUK) has sounded the alarm, stating that over 3,000 family-run enterprises would face significantly higher inheritance tax bills each year if business relief were removed. This move could lead to company closures and widespread job losses.

According to the Institute for Fiscal Studies (IFS), business relief on inheritance tax currently saves companies £1.4bn annually. Neil Davy, chief executive of FBUK, has urged Chancellor Rachel Reeves and Business Secretary Jonathan Reynolds to reassure businesses that Labour will not target this relief to raise revenue.

Davy highlighted, “In our conversations with the previous government, it was clear that ministers understood the importance of this legislation in supporting family businesses. We found that reassuring.” However, Labour has yet to provide similar assurances.

As the election approaches, the lack of clarity from Labour is causing anxiety among small businesses, who fear an inheritance tax increase as a potential revenue source for public services. Martin Greig, FBUK’s chief advocacy officer, called for immediate clarity on Labour’s tax strategy.

Currently, inheritance tax is levied at 40% on estates above £325,000 (or £500,000 if a main residence is passed to children). Business owners can claim up to 100% relief on business assets, including shares in unlisted companies, a relief claimed by 3,380 businesses in the 2020-21 tax year, according to FBUK.

Family businesses comprise 90% of all privately owned firms in the UK, amounting to nearly five million companies that collectively employ around 14 million people.

Recent reports suggest Labour plans to raise £10bn by increasing capital gains tax and tightening inheritance tax reliefs. During the campaign, Labour pledged not to raise income tax, National Insurance, VAT, and corporation tax, which together represent about three-quarters of the Treasury’s tax revenue.

The IFS has recommended capping or removing various tax reliefs, including those for agricultural land, businesses, and pensions. IFS deputy director Helen Miller stated, “One measure that should be taken, regardless of the desired revenue, is to remove or cap various reliefs.”

However, Davy warned that eliminating business relief would hinder economic growth, forcing companies to reserve funds for future tax liabilities or to liquidate or sell the business upon the owner’s death to cover tax bills. “This [£1.4bn in tax relief] isn’t money sitting in personal bank accounts. It’s capital within the business, used for investment, growth, employment, and ensuring long-term stability,” Davy emphasised.

Ollie Saiman, co-founder of wealth manager Six Degrees, described the removal of inheritance tax relief on private company shareholdings as “the nuclear option” with severe implications for small businesses.

A Treasury spokesman commented, “We have highlighted the need for economic stability to grow our economy and keep taxes, inflation, and mortgages as low as possible.”