Yesterday's UK budget was a mixed blessing for high net worth individuals. Although Gordon Brown, the UK’s chancellor, backtracked on several rulings previously delivered in haste on Venture Capital Trusts and the income tax threshold on trusts, tax practitioners have warned that other measures may have disastrous effects on the transfer of inter-generational wealth. Although the chancellor has increased tax relief levels on VCTs from 20 per cent to 30 per cent, the previous level was 40 per cent. “With this level of relief now reducing, any investors looking to invest in VCTs should use the 40 per cent allowance while they can and subscribe in the current tax year, closing on 5 April 2006. The next two weeks is now likely to see a frenzy of individual investors wishing to subscribe in the last chance saloon,” said Robert Mitchell, investment manager of The AiM VCT and AiM VCT2. As expected, Real Estate Investment Trusts will be introduced in the UK from 1 January 2007. As a concession to the real estate industry there will be a reduction in the required distribution rate to 90 per cent of net profits to provide greater flexibility for companies to operate within the regime as well as a reduction of the interest cover test to 1.25 on a pre-capital allowances basis. However, a conversion charge will be levied on companies electing to join the new regime at a rate of 2 per cent of the gross market value of investment properties. UK film tax incentives have been modified but not abolished as was widely forecast. The new regime is much less attractive to investors although under the new rules films need only have a 25 per cent UK element to qualify. On the positive side, the research and development tax credit, worth up to 150 per cent of expenditure, has been extended to companies that employ up to 500 people, up from 250 previously. For HNWIs who have invested in such companies this may take their investments into profitable territory. For those private investors with a buy-to-let property portfolio there was also some good news with the raising of the stamp duty threshold to £125,000. HNWIs in the UK may have thought that government-planned alternatives to buying an annuity at age 75 would allow them to pass on lump sums of cash to their estate with some tax benefits. The budget confirmed that the full 40 per cent inheritance tax would apply in such cases. The government had suggested the idea of alternatively secured pensions to cater to religious groups for whom the compulsory purchasing of an annuity is not compliant with their religious laws. These suggestions were always planned for introduction by 6th April this year. This may have created a tax loophole for HNWIs, but the budget made it clear the government wants to make sure that pensions are used for income in retirement and not estate planning. Stuart Davies, director on Deloitte’s private client team, told WealthBriefing: “Retirees may have been planning on still passing a lump sum on after age 75. But today, the situation is that if a lump sum is left after someone has died over the age of 75, then it would form part of the estate and be heavily taxed. It could be passed on to the spouse who is then exempt, but previously it was thought that adult children could join the scheme.” Mr Davies said that this meant his team would have to change some of the advice it had been giving to its clients. Another change to pensions which would be of importance to HNWIs is for those under age 75 that have not yet drawn benefits - budget changes means that the lump sum can be paid out of scheme and will not be subject to tax. “This was previously only the case by concession; now the government has made it legislation and so we have clarity here now,” said Mr Davies. But the real sting in the tail has come from the trust modernisation proposals. Although the income tax threshold has been raised from £500 to £1,000, the new regulations propose ending the potentially exempt transfer regime. This may have potentially disastrous implications for the transfer of family wealth, according to Tim Gregory, partner at the UK-based accountants Saffery Champness. A further budget measure is to abolish seeding relief from SDLT. This previously allowed individuals, and companies, to put property into an offshore unit trust without paying any SDLT on the purchase price. This has been stopped, and will hit people in the middle of a transaction. There was also no comment in the budget on non-domiciled residents in the UK. Other measures that WealthBriefing will be examining in more detail in the coming weeks include measures on capital gains tax avoidance through bed and breakfasting schemes and measures against the use of options.