Britain’s middle class and family-owned businesses face the prospect of a significant tax increase as Chancellor John Healey prepares to deliver his first Budget against a difficult economic backdrop.

Reports published on Tuesday indicate that the Treasury is considering taxing the transfer of family businesses to the next generation as income, potentially at a rate of 45%. The proposal would represent a major change for business owners planning to pass companies to their children and could become one of the Budget’s most politically sensitive measures.

Family firms in the spotlight

The proposed change would target owners transferring businesses during their lifetime or on death, according to reports. Although the government has ruled out further changes to capital gains tax, an income-tax charge could substantially increase the cost of succession for some family-run companies.

Family businesses and advisers are likely to argue that the measure could force owners to sell assets, raise debt or break up companies to meet tax liabilities. The government, however, is under pressure to raise revenue while protecting its fiscal position amid higher borrowing costs and elevated energy prices.

Markets await fiscal signals

Investors are also focused on whether the Budget will preserve confidence in the government’s borrowing plans. A global bond sell-off has increased the cost of servicing public debt and reduced the fiscal headroom available to the Treasury, making decisions on tax, spending and borrowing particularly consequential.

Markets are expected to scrutinise the government’s forecasts and its plans for the coming financial year. Bank taxation is another potential source of revenue, with reports suggesting that ministers could consider increasing the existing surcharge on bank profits.

The FTSE 100 and FTSE 250 have performed strongly this year, but higher bond yields and mortgage rates have begun to challenge that resilience. Housebuilders, in particular, remain sensitive to borrowing costs after an earlier rally linked to government support for first-time buyers.

Pressure on households and businesses

The Budget comes as retailers warn that rising operating costs are increasingly being passed on to consumers. British Retail Consortium data showed shop prices were 2.1% higher in October than a year earlier, the fastest annual increase since February 2024. Food-price inflation rose to 2.9%, while non-food inflation accelerated to 1.7%.

Retailers cited transport and energy costs, employment expenses and packaging levies as contributing factors. The figures add to concerns that households face renewed pressure even as policymakers seek to support economic growth.

Recent business surveys offered a more positive signal, with UK manufacturing, services and composite activity indicators all showing expansion in October. But stronger demand may also make it harder for the Bank of England to reduce interest rates quickly if inflation remains persistent.

A high-stakes first Budget

Healey’s first Budget therefore carries risks on several fronts. Tax changes affecting family businesses could raise substantial revenue but provoke opposition from entrepreneurs and middle-class voters, while measures aimed at banks or higher earners could test the government’s relationship with the business community.

For investors, the central question will be whether the Chancellor can demonstrate credible fiscal discipline without weakening already fragile household and corporate confidence. The treatment of business succession, alongside borrowing plans and measures to contain inflationary pressure, is likely to define the market reaction.