Wealthy in race to beat the Budget

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SOME of Britain's richest people have been rushing since the election last May to take advantage of a tax loophole the Chancellor could close in next week's Budget.

Privately, tax advisers say participation by the wealthy in a scheme known as "private" authorised unit trusts has been growing tremendously. Many investment managers, including some of the biggest, manage these perfectly legal schemes on behalf of private clients.

One tax expert admitted last night: "It is a gross abuse." The schemes are not marketed publicly by the financial planning industry, but created especially for individuals with very large sums to invest in shares or property.

There are no comprehensive figures on the extent of these investment plans, which are legally identical to the unit trusts millions of ordinary savers buy shares in. However, as much as pounds 8bn could have been invested in them in order to allow rich taxpayers to reduce the amount of capital gains tax they have to pay.

The amount of tax revenue lost is likely to be small simply because so few schemes are involved. Only 130,000 people pay any capital gains tax, and only a tiny minority of those will have opened the "private" unit trusts.

But these individuals will have been able to save millions of pounds in tax by using the fund to control the timing of the capital gains they receive. If their investment gains are realised when they have other losses to offset against them, or if they are spending a full year abroad, their tax liability will be reduced.

Technically, all unit trusts are open to any investors; but it is easy to discourage interest by setting a prohibitive initial investment, usually pounds 500,000.

The rich, and their accountants, have become alarmed about what measures next week's Budget might contain to clamp down on tax avoidance. Some expect hundreds of clauses in the Finance Bill cracking down on favoured schemes.

Last week the Chancellor acted to close a loophole concerning one kind of offshore trusts. The Inland Revenue had warned that last-minute tax leakage could have cost hundreds of millions of pounds in the run-up to the Budget.

One tax planning firm was reported to be informally charging a 3 per cent commission to put into a "fighting fund" to finance legal battles against the Inland Revenue over the tax avoidance measures it considered the most open to challenge by the authorities.