Wealth Club, surveyed over 500 investors and found a sharp drop in appetite for VCTs ahead of the planned tax relief cut: over 40% say they’ll stop investing, a similar number will reduce commitments, and 96% want the government to reconsider, fearing a funding hit for UK start-ups.
Wealth Club, has surveyed its clients* to understand what effect this change will have on investor behavior;
- 41.6% of investors said they won’t invest in Venture Capital Trusts (VCTs) once the changes are introduced, 43.5% will invest less
- 96.4% would like the government to reconsider the cut in VCT relief
- 85.6% think overall investment in start-ups and scale-ups will decrease
- Only 13% of VCT investors expect to invest more in other venture capital schemes (EIS or SEIS)
*The survey was completed the week commencing 01/12/2025, and received responses from 511 high net worth and sophisticated investors, including 474 VCT investors.
Alex Davies, CEO and Founder of Wealth Club, commented;
“VCTs have been a crucial source of funding for the UK’s small and growing companies over the last 30 years. However, UK start-ups should prepare for a funding drought after the government’s decision to water down income tax relief.
Two fifths of Wealth Club clients expect to invest less in VCTs under the new rules, another two fifths say they won’t invest anything at all.
That should not be a surprise. The last time VCT relief was cut by 10% fund raising fell by 65% year-on-year. The last time VCT income tax relief was set at 20%, way back in 2003/04, the industry raised just £70 million. That compares with nearly £900 million raised in 2024/25.
We are seeing a rush of investors looking to get in before the tax rules change, which is likely to drive a race to access the best VCTs before they fill up. However, we expect VCT investment to fall off dramatically next tax year. That is bad news for the hundreds of small UK companies that rely on VCTs for funding and is frankly unforgivable for a government that claims to be all about economic growth.”
About Venture Capital Trusts (VCTs)
Why VCTs are worth investing in
Most investors are initially attracted to VCTs for the tax breaks, and they are generous. Investors can get up to 30% back in income tax relief up front (20% from April 2026), any dividends paid by the VCT are tax free and growth is free of capital gains tax too.
However, VCTs are more than just a tax planning tool. They’re probably the best way for UK investors to access fast growing smaller companies. Revenue growth from VCT investees far outstrips what you see in main market listed companies, and the result has been some attractive returns for investors over the longer term.
Exposure to high growth, smaller companies also has the potential to diversify a conventional portfolio. Long-term performance is often only loosely correlated with the wider economy. Highly disruptive businesses grow by taking market share from incumbents rather than relying on market growth.
The rules governing VCTs mean they’re also an excellent way to back smaller businesses. It’s their role providing support to the next generation of UK start-ups, driving innovation and creating jobs, that earns them the tax relief from the government – and many investors feel that this is something they wish to support too.
Who should consider them?
VCTs are higher risk, and while they’re listed on the stock market, in order to qualify for tax relief investors must hold the shares for at least five years before selling – making them inherently long-term investments. Unlike most conventional funds and shares the minimum amount you can invest is comparatively high – often £3,000 or more. All of this means they are best suited to wealthier or more sophisticated investors.
VCTs are popular with two groups in particular.
The first is higher earners or wealthier investors who are limited in what they can put into more mainstream tax wrappers. Those who already use their full £20,000 ISA allowance or whose pension contributions are tapered due to the amount they earn. The £200,000 a year annual VCT allowance is generous and can save higher earners up to £60,000 in upfront income tax (£40,000 from April 2026).
The second group is those in, or near, retirement who use VCTs’ tax free dividends to supplement income from other sources. Because they’re higher risk, VCTs shouldn’t be considered a replacement for a pension, but they can help to top-up income from more conventional sources.
Some other tips?
- Seek diversification – VCTs are high risk so spread your investments over multiple managers. Fortunately there’s lots of choice in the market, from trusts with expertise in particular sectors, like Pembroke VCT, to broad generalist funds like the Albion VCTs.
- Reinvest and recycle – Get an additional 30% initial income tax relief by reinvesting those tax-free dividends. You can also recycle the proceeds from selling the shares, once they’ve been held for five years, into a new VCT.
- Be aware of discounts – VCT shares trade on the stock market, but often at a discount to the underlying value of the fund’s investments. That shouldn’t be a problem for long term investors, who will receive the majority of their return through tax free dividends as well as underlying growth. However, it’s something to be aware of and is another reason these should be treated as long term investments.
- Capacity limits – If you see something you like, it can pay to act quickly. VCTs have limited capacity each year and popular offers can quickly reach capacity and close to new investors. Some VCT managers also offer lower fees to investors who invest soon after an offer opens.
