This is how it works. Chancellor Gordon Brown increased the tax relief on venture capital trust (VCT) investments to allow on taxpayers 40 per cent tax relief on up to £200,000 of investment both this tax year and the next, creating a fund that is then free of capital gains tax (CGT) and of income tax on dividends. Tax relief is given by way of a reduction in the amount of income tax which would otherwise be payable.

Levels, and bases of, and reliefs s from taxation are subject to change.

Asset backed
These are higher risk investments, so it is essential that we advise appropriate clients to choose the VCT fund carefully although there are "asset-backed" VCTs now coming forward that involve only an acceptable capital risk.

So the first step for an appropriate investor is to move enough capital into VCTs to eliminate income tax, both this year and next. Using a VCT can have the effect of giving back 100 per cent of your tax bill then, selling the shares in three or more years' time tax free, you could reinvest the net proceeds into a pension fund and so get yet further tax relief on the gross amount invested.