Inheriting small businesses the German way

Whether or not to tax small, inherited businesses is up for debate. But Germany has one solution that could please everybody.

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.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

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.

Advertisement
Advertisement - Article continues below

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.

Advertisement

Recommended

Visit/519223/how-can-we-raise-more-money-in-tax
Economy

What are the best ways of raising more money in tax?

Given that whoever wins next week's election will be going on a massive spending spree, we're going to need to raise at least some of that money throu…
5 Dec 2019
Visit/518715/what-are-the-biggest-mistakes-investors-make-when-it-comes-to-tax
Investment strategy

What are the biggest mistakes investors make when it comes to tax?

The tax implications of an investment are something we rarely consider until after the event. That could prove to be an expensive mistake, says Domini…
27 Nov 2019
Visit/516603/how-tax-has-shaped-the-course-of-human-history
Economy

How tax has shaped the course of human history

Taxation is as old as civilisation itself. But how much is too much? Dominic Frisby looks at how taxation, war and society have evolved together over …
16 Oct 2019
Visit/personal-finance/tax/601089/a-few-ways-to-save-tax-before-the-end-of-the-tax-year
Tax

A few ways to save tax before the end of the tax year

The end of the tax year is nigh. You have until midnight on 5 April to take advantage of various tax allowances or risk losing them.
3 Apr 2020

Most Popular

Visit/investments/property/601081/three-things-matter-for-the-uk-housing-market-now-and
Property

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020
Visit/investments/stockmarkets/601101/has-the-stockmarket-hit-rock-bottom-yet
Stockmarkets

Has the stockmarket hit rock bottom yet?

The world's stockmarkets continue on their wild and disorientating rollercoaster ride. Investors are still gripped by fear. So, asks John Stepek, have…
2 Apr 2020
Visit/investments/property/601065/what-does-the-coronavirus-crisis-mean-for-uk-house-prices
Property

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020
Visit/investments/commodities/energy/oil/601107/oil-shoots-higher-have-we-seen-the-bottom-for-the-big-oil
Oil

Oil shoots higher – have we seen the bottom for the big oil companies?

Just a few days ago everyone was worried about negative oil prices. Now, the market has turned upwards. John Stepek explains what’s behind the rise an…
3 Apr 2020