The UK's annual budget has significant implications for the wealth management industry and its clients. Here are some reactions.

Yesterday's UK budget sent mixed messages to the country’s high net worth individuals, with a cut to the top rate of income tax but tax hikes on property worth more than £2 million ($3.17 million).

The wealth management industry reacted fairly positively to the budget. For example, Coutts said that its clients are likely to welcome finance minister George Osborne's desire to ensure the tax system is simple, predictable and fair. It was not, however, without controversy.

(To view the budget details, click here).

Top rate cut

The most welcome news for most in the wealth management industry was the 5 percentage point reduction in the top rate of income tax to 45 per cent on income above £150,000.

“It would have been great if they could have cut it back to 40p, but where we are economically it might have adversely affected the overall economic picture and required the Chancellor (the UK finance minister) to give with one hand for income tax while taking with the other from elsewhere,” said Alex Ruffel, founding partner of Berkeley Law.

"The headline tax rate will result in a 9 per cent saving for employers for a typical expat package, making it easier for employers to bring their global talent to the UK,” said Sean Drury, tax partner at PwC. Drury wants to see a further reduction in the future: “We won't attract businesses unless we can also attract their people,” he said.

The clawback: stamp duty

George Osborne partially offset the reduction in income tax for top earners with higher tax rates on high-valued real estate, although he did not go all the way and introduced the mansion tax that the Liberal-Democrats, the junior partner in the coalition government, had advocated. What he did do was to raise the stamp duty charge from 5 to 7 per cent on property valued at £2 million and above, and 15 per cent when they are bought through a company. What is more, to ensure that wealthy non-residents are caught by the changes, the government will introduce capital gains tax on residential property held in offshore structures.

Charles Hutton, partner in the private client team at law firm Speechly Bircham, said that although parts of this announcement were expected, the scale of the tax increase was surprising. “Anybody who has an offshore structure owning UK residential property, or non-UK residents thinking of acquiring UK property, will have to review the implications of the announcements in today’s budget very carefully,” he said.

Anti-avoidance rule to come into force next year

The government is also set to target tax planning with legislation intended to come into force next year, but the details of this measure are not yet known. “The introduction of a general anti-avoidance rule (GAAR) as part of next year's finance bill will be of interest,” said Dominic O'Connell, head of tax, trust and estate planning at Coutts. “Our hope is that it does not inadvertently catch reasonable, non-aggressive, tax planning.”

“The GAAR is very interesting and could be controversial. It is a bit like the Human Rights Act, when the principle is good but it could be alarming if it is wrongly applied,” said Ruffel.

Vestra Wealth said that it welcomes any move to clarify the rules on tax planning and steps to make the system fairer for all taxpayers.

David Kilshaw, tax partner at KPMG, said that the most important aspect of the GAAR is the threat of retrospective legislation.

Bank levy rise

George Osborne said that he is committed to ensuring that the bank levy raises £2.5 billion each year and that he will increase it to 0.105 per cent from January next year, only a year after it was increased from 0.078 per cent to 0.088 per cent.

“While on the one hand the chancellor is advocating the importance of predictability of the tax system, this does not seem to be the case for the banks,” said Matthew Barling, banking tax partner at PwC. “Yet another change in the rate is not a good advert for the predictability of the UK tax system in the financial services sector.”

Effect on charities

One of the severest assaults on the budget came from Chris Groves, partner in the wealth planning team at Withers, who said that charities may come to see the 2012 budget as a significant attack on their funding. The government will introduce a limit on all uncapped income tax reliefs: for anyone seeking to claim more than £50,000 of relief, a cap will be set at 25 per cent of income.

“This measure will particularly affect large donations made by philanthropists, who may have donated amounts significantly in excess of their annual income and will now see their tax relief and incentive for giving reduced,” Groves said.

Will the wealthy really be taxed five times as much?

“We’ll be getting five times more money each and every year from the wealthiest in our society,” Osborne told parliament yesterday.

“I think it is unlikely that the government will get as much as five times more in tax from the country’s wealthiest individuals,” said Ruffel. “The changes are more likely to affect those who derive their wealth from income earnings and hover around the £150,000 top tax band rather than the ultra-wealthy, whose wealth is in capital.”

Ruffel also said that the reduction in corporation tax, to 24 per cent from April and eventually to 22 per cent in 2014, will be good for the economy and indirectly good for individuals, but the most important thing is that it shows that the UK is open for business.