Inheriting small businesses the German way

When I talk about inheritance tax (IHT), and about how all the loopholes that allow people to avoid it should be slammed shut immediately, there is always a backlash from family business and farm owners.

If we want a vibrant small business sector, and if we want our farming industry to have a hope of surviving, they say, we must exempt both these areas from any and all inheritance taxes. I’m not so sure.

Farming is so subsidised and distorted a business these days, it is impossible to have any sense of its real worth. Farmland has outperformed gold and houses in Mayfair over the last decade. Does that tell us that farming is a fabulous business we should support at any cost, or does it tell us we already support it far too much?

Small businesses might be a different matter, but I still can’t see a case for businesses to be inherited tax-free with no subsequent obligation from the new business owner (the heir) to the long-suffering taxpayer.

In this article, I suggest that IHT (or income tax on inheritance) could be deferred until sale – something that would encourage a long-term approach. But better might be to look at the German model.

We are constantly told that one of the reasons that Germany has such a brilliant manufacturing sector is down to its small and medium-sized family businesses. But as one reader pointed out to me this week, the reason they have so many is that the tax rules very heavily incentivise it.

No tax is paid on an inherited business as long as all the staff employed on the transfer remain employed for ten years and the business is not sold for 15 years. How’s that for an incentive to keep a small business on the go?

• Germany already has a version of the income tax I suggest as a replacement for IHT in that it is transfers that are taxable, and that the rate depends on the circumstances of the beneficiary.

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