The budget has delivered a ‘long overdue’ modernisation of investment trusts, according to the Association of Investment Companies (AIC).

Chancellor George Osborne’s plans included a modernisation of the tax regime for investment trust companies to make it clearer for the companies and their investors, and ensure the rules fit in with modern investment practices and strategies.

Ian Sayers, director general of the AIC, said the revised legislation - of which draft regulations will be published for consultation next month - will overhaul the investment trust tax rules for the first time since 1965, so is ‘long overdue and is very welcome’.

He added: ‘I am confident that this reform will deliver a robust and flexible set of rules which will allow the sector to expand into new areas of investment.’

The revised rules will remove limits on how much an investment trust can invest in any one company and allow investment trusts to make greater use of derivatives.

Restrictions limiting investment trusts’ income to specified sources will also be removed.

The amount of income an investment trust can hold in revenue reserves will be maintained at 15 per cent, which means investment trusts will continue to have the ability to ‘smooth dividends’ for shareholders during more difficult times.