One bit of good news in the Budget should help the venture capital sector attract more money. The Chancellor has increased income tax relief on investments from 20 per cent to 40 per cent for 2004/05 and 2005/06.
Furthermore, the personal investment limit will increase from £100,000 to £200,000 in any tax year.
The income tax relief is paid direct to the investor rather than to the VCT as indicated in the pre-Budget report. However, capital gains tax deferral relief is to be abolished.
Sadly, the Chancellor has again declined to bring in inheritance tax relief on VCT investments, which would have encouraged investors to take a longer-term view.
Some VCT managers are concerned that the enhanced income tax relief may bring investors into the market who do not understand the long-term nature of venture capital and may start clamouring for their money back as soon as the three-year minimum holding period has elapsed. This would not be good for the stability of the VCT sector.
I expect that most of the better-performing VCTs will be raising money during the next tax year. It must be remembered that VCTs are a long-term investment and, because their dividends are tax-free, they are an ideal way for high earners to supplement their pensions.
While VCTs are more risky than investing in unit trusts, they are on the whole safer than investing in individual shares because of the wider spread of investments.
It is sensible to spread the risk further by investing in a portfolio of VCTs. Some of the ones I like for the longer term are those issued by Close Brothers, Baronsmead, Quester and AIM VCT.
As the economy improves, some of the smaller companies in which they invest should show excellent returns.