AIC’s tax-efficient take

Proposals in fledgling Chancellor of the Exchequer Alistair Darling’s Pre-Budget Report have the potential to improve returns for investors in AIM-traded investment companies and enhance the attractions of venture capital trusts (VCTs) with AIM holdings.

So says the Association of Investment Companies (AIC), pointing out that capital gains on AIM-traded investment companies are currently taxed at 40 per cent but were not eligible assets for business taper relief and cannot be held in ISAs. If the proposed changes are passed into the statute books, investors will only have to pay 18 per cent tax on their disposals from April 2008. This will further enhance investment returns for higher-rate taxpayers and should increase investment activity in this section of the junior market.

‘AIM-traded investment companies and AIM-focused VCTs have emerged as winners from the Chancellor’s announcement,’ enthuses AIC director general Daniel Godfrey, concluding that the potential capital gains tax reduction will ‘undoubtedly’ increase their attractiveness to investors.

‘At the same time, the tax position of shareholders investing directly in AIM trading companies will deteriorate,’ continues Godfrey. ‘However, VCTs will continue to offer tax-efficient exposure to a diversified range of AIM stocks – their tax advantages will be even more pronounced than is currently the case.’

The Chancellor’s wider proposal is to abolish both taper relief, which saw capital gains tax fall to ten per cent after two years, and indexation allowance for capital gains tax, and instead introduce the new 18 per cent flat rate (see page 26).