Financial experts are predicting a surge of interest in Venture Capital Trusts (VCTs) as the end of the tax year approaches.

One commentator in particular, predicts that demand for VCTs – investment companies that typically invest in small high-risk UK unlisted companies – will increase by 70 per cent on last year’s figures, in light of the forthcoming increase in the top rate of income tax and coupled with the reduction in pension tax relief for higher earners.

Commenting, Martin Churchill, editor of Tax Efficient said: “There is a resurgence of interest in VCTs this tax year and I expect demand to be around £250m, which would be an increase of about 70% on last tax year.

“This is driven in my view by an appreciation that the initial tax break has allowed the performance of most VCTs to weather the credit crunch, a realisation that the successful VCTs are producing a very respectable annual tax-free income stream and the attraction of the VCT tax reliefs to high earners following the hike in the top rate of income tax and the pension changes.”

Ben Yearsley of Hargreaves Lansdown, believes VCTs “suddenly look a very attractive proposition” for investors who are looking for tax efficient investments.

“Higher rate pensions relief is restricted to a maximum investment of £30,000 for some investors, therefore being able to invest £200,000 and receive a rebate of £60,000 looks an obvious alternative for higher risk investors,” he explained.

Meanwhile, Matthew Woodbridge, head of investment products at Chelsea Financial Service suggests VCTs are a useful complement to pensions.

“With the proposed squeeze on tax relief for pension contributions, there are some compelling reasons to consider VCTs as part of your retirement/ tax planning. I think that tax free income is paramount to the attractiveness of VCTs,” he said.

However, Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC), urged caution, stating that investors should not invest in a VCT purely for the tax benefits.

“The attractions of the VCT sector have moved up the agenda in the current tax environment, but it’s also worth remembering the old adage that the tax tail should not be allowed to wag the investment dog,” she said.

© Fair Investment Company Ltd