The unknown tax break!

VCTs have attracted a lot of interest because of the tax break against other income in the year you buy them. True, Gordon Brown has reduced the break from 40% to 30% - but it's still sizable.

However, that only applies to new subscriptions. But there's another tax break which is stunningly simple and yet practically unknown.

Dividends from VCTs are exempt from tax. And apparently you don't have to subscribe (ie buying new shares) to get this tax relief - you can buy second hand shares on the market from any stockbroker.

Now, yields on VCTs can be 6 to 9%. One of the reasons for this is that they tend to recirculate capital gain as yield in order to make use of the tax break - so basically, you're looking at an investment which, like a bond, should be worth zero when it reaches the end of its life. Of course you don't have bond-style security, since some investments may be high risk (though in the case of the many AIM trusts now available that's less the case).

Why is there no stockbroker looking to exploit this loophole? As a higher rate taxpayer, with significant investment income, I could probably save about four grand a year if I bought AIM VCTs instead of regular unit trusts to get my yield up. The right due diligence, and I should minimise the risks.

Okay, these aren't liquid investments. (Well, nor are buy to let properties. But there's a whole industry serving those!) But while brokers invest in coverage of smaller companies, no one is really offering an aftersales service for VCTs. Brokers are only interested in the low hanging fruit of initial subscriptions.

Yet again, financial advisers aren't earning their money.

Oh yes, and I got someone offering me a wonderful break on Inheritance Tax the other day. Hm. I'm over forty and have no kids. Why can't he manage to save me the higher rate tax I'm paying now, instead of saving me theoretical money when I've snuffed it?