With the Budget just days away, many in the industry are predicting what the Chancellor will say on some of the key issues of the moment including Real Estate Investment Trusts (REITs) and Inheritance Tax (IHT).
With the announcement in the pre-Budget report in December, of the introduction of a new vehicle to allow investment in residential property, the likelihood is more details will be unveiled on 22 March.
Ian Anderson, director and chief corporate counsel at Cicero Consulting, says he expects the final rules regarding REITs to be published next Wednesday.
Meanwhile Tim Green, a real estate analyst from Brewin Dolphin Securities, says it is hoping there will be a softening of the provision terms for REITs so the requirements for interest cover will be made less onerous.
He adds: “This is so British property companies will be able to find the terms sufficiently encouraging to convert to a REIT. We remain optimistic Gordon Brown will push ahead with a workable framework.”
Green points out the real driver for this is the increased wealth we’ve seen globally is looking for an investment home, and he says there is no reason why UK property could not be that home.
He says: “The tax regime needs to be attractive to international investors, and it’s in the Government’s interests to make it work, as there would be very little point in making the terms so onerous that nobody will want to convert to a REIT.”
On the subject of IHT, predictions vary as to what exactly the Chancellor will announce.
Anderson says any real movement on IHT is unlikely as Gordon Brown is concerned about fuelling a rise in house prices again and believes linking the IHT threshold to asset inflation would so this. As for the rules on IHT within the context of A-Day Anderson says: "We are expecting a more detailed Brown response to the Turner report and we are expecting the rules to be finalised before A-Day" Anderson adds that were this not to happen on Wednesday he would expect the pensions indsutry to be up in arms given the length of time left to implement any regulations before April 6.
Alasdair Buchanan, group head of communications at Scottish Life, says what we know at the moment is what the policy is going to be, so it’s more probable we won’t hear anything in the speech, but will see items in the the papers published afterwards.
He adds: “The policy is pretty clear, the Government has absolutely no intention of allowing people to pass on inheritance either through a family SIPP or any other vehicles, and anyone trying to find a way around the rules will be hit pretty hard with retrospective legislation.”
Buchanan also points out, there is unlikely to be any surprises, all it will be is the detail of how they regulate it, but he admits there is always the worry of a sledgehammer approach.
He says: “There is the concern the rules may be drawn in such a way as to cause problems to normal savers, and there is always a nagging doubt that preventative legislation may have unintended consequences.”
But John Lawson, head of pensions policy at Standard Life, says he doesn’t think there will be a lot said on IHT in general as new thresholds were announced back in November, and he also very much doubts it on pensions.
He adds: “I don’t think there will be anything on IHT and pensions until probably May, at the most optimistic. And it is going to make it very difficult for advisers as they will be advising in a vacuum.”
Lawson continues, if there is going to be anything mentioned in the Budget on IHT, it won’t be pensions related and is more likely to be an announcement of a major root and branch review of IHT legislation, as we approach pensions simplification. But he says as short-term changes go, an announcement would be very unlikely.
Stephen Williams, an tax analyst from Brewin Dolphin Securities, adds on a more general note there is a chance upper limits might be set for the market capitalisation for new investments to qualify for IHT relief to around £100m.
He says the arrival of new asset managers such as New Star has increased the market substantially and is not what the Alternative Investment Market (AIM) is meant to do, and so the Treasury may decide to limit it to these sorts of levels, which would increase the risk to private investors using these schemes to reduce IHT liability.
Williams also says he doesn’t expect any changes to Enterprise Investment Scheme legislation, although another possible issue could be a change to business taper relief, but he admits this wouldn’t necessarily have a major impact.
And he adds: “We also hope, although not very hopefully, that the IHT-free threshold will be increased to take into the increase in property prices. But I guess we’ll just have to wait and see.”
Margaret Jago, technical manger at Scottish Equitable International, says she is not expecting terribly much from the Budget in terms of IHT.
But she adds: “There is the possibility of more details on Pre-Owned Asset Tax (POAT) which affects IHT planning schemes. Although the change was announced in the pre-Budget report, there has never been any draft legislation or elaboration, so that may feature and orientated towards schemes which can invest in residential property.”
Meanwhile another hot topic, Venture Capitalist Trusts (VCTs) is also likely to feature following an announcement in the pre-Budget Report in December, of a full review of the VCT market.
Anderson says the Chancellor will tighten up the investment rules for VCTs taking away their ability to invest in property. "I think he eants to see property in REITs and not in VCTs and he waqnts to see industry in VCTs," Anderson adds.
Meanwhile Lenny Norstrand, an analyst from Brewin Dolphin Securities, says the change two years ago to give VCTs a 40% tax break, is about to come to the end of its promotional period, and the expectation is Gordon Brown will change it.
But he says there are two views at the moment, with some rumours in the industry which say Brown may keep the tax rate as it is, following his announcement in the PBR of a full review of the VCT market in the next coming tax year.
Norstrand says: “There is a view if Brown changes the rules in the next coming tax year, it would be a bit confusing for him to change them this year as well. So there is one view the 40% rate will be maintained, while others think it will be brought down to around 30%.”
He adds although he would be delighted if the 40% rate stayed, his feeling is the Chancellor is more likely to reduce the rate to around 30%.
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