Advisers expect their clients to become more interested in investing in Venture Capital Trusts (VCT) as they seek to make up for a reduced pension allowance and take advantage of tax-free dividends, a survey suggests.
Almost a third of advisers questioned in a survey commissioned by venture capital firm Albion Ventures, said they believed client interest in VCTs would increase over the coming tax year, compared with 3% who thought it would decrease.
The clients' biggest reasons for wanting to invest in the tax efficient funds, the survey found, were they have maximised their ISA contributions, the ability to generate tax free dividends, and the new limits on pension contributions, which will see the total amount that savers can keep in their pension reduced from £1.5m to £1.25m.
The Chancellor announced in his Autumn Statement last year that tax free pension contributions would be capped at £40,000 per year, down from £50,000, and at £1.25m over the life time of the pot.
The changes will take effect from 2014/15 and are expected to generate the government an extra £1bn a year.
However, ISA limits were increased to £11,880 per year in this year's Autumn Statement and the Chancellor stopped short of announcing the introduction of a life-time cap, which was previously expected to be set at £100,000.
The Chancellor said in his Autumn Statement that any investments linked to a VCT share buyback or made within six months of selling shares in the same VCT will not qualify for tax relief.
A share buyback is where a VCT launches an offer to existing shareholders to cash in their shares, having originally achieved a 30% tax credit on their investment and held the shares for at least five years, on the condition they then reinvest into a new offer.
Albion Ventures managing partner Patrick Reeve said: "VCTs are set to attract many new investors this tax year and this is underlined by our own experience as we're seeing interest from an increasingly wide range of potential investors, from young professionals to the comfortably retired.
"The findings also suggest that advisers have become more familiar with VCTs, possibly as a result of RDR, and as a result feel confident recommending them to suitable clients.
"Ultimately it's been a combination of low returns on savings products and the reduction in the pension lifetime allowance that have acted as a catalyst for VCTs, which have a proven ability to deliver a reliable income stream and act as a tax efficient retirement supplement."
The survey also found that 11% of advisers believed their clients would be investing in VCTs as a means of improving their portfolio diversification while 10% said the reason was that IFAs have become increasingly familiar with the sector.
More than one in six people investing in a VCT this tax year will be doing so for the first time, Albion said.
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