Peter Hicks, research analyst at Chelsea Financial Services, explains why Venture Capital Trusts (VCTs) are gaining enhanced appeal as tax-efficient investment and financial planning options amid harsher CGT, IHT, and pension tax reforms post-budget.
Mercifully, and as predicted, Venture Capital Trusts (VCTs) were left untouched by Rachel Reeves’ Autumn budget. This was in spite of very significant tax rises in other areas; including higher CGT rates, an IHT raid on family farms and businesses, and a new IHT hit on private pensions. From 2027, pensions will no longer be exempt from inheritance tax. This new measure will have frustrated the long-considered estate-planning strategies of many advisers, clients and clients’ families.
Key benefits: tax-free dividends and gains
All of these harsher tax penalties on pensions, CGT and IHT, have made VCTs even more attractive sources of tax-efficient investment. It must be said, VCTs were never free from IHT – they definitely form part of the client’s estate when they die – however, the removal of IHT exemptions on other areas, particularly pensions, have put VCTs on a more even footing.
Like pension contributions, VCT investors receive income tax relief. This occurs when they buy new shares in a VCT offer; any subsequent dividends and capital gains are also tax-free.* Unlike a pension, the tax relief is a flat 30% and is not directly reinvested back into the product.
That said, an investor can usually reinvest their VCT dividends using a Dividend Reinvestment Scheme (DRIS), with the reinvested dividends qualifying for further income-tax relief. Whether or not an investor decides to use the DRIS option is a question of personal preference; reinvesting dividends into a VCT can create administrative headaches. This is because new share certificates are issued each time; over a number of years this can generate a lot of share certificates. It can be easier to pool dividends as cash and then use them for future lump-sum investments.
A VCT investor must hold their shares for five years, any liquidation of shares prior to five years can mean having to pay back the 30% income tax relief – this includes any shares bought using DRIS, each new group of shares must be held for five years. However – and here’s the kicker – proceeds of shares sold after a five-year holding period can be used to buy another VCT, unlocking a further 30% of your income tax bill. An investor cannot buy the same VCT within six months of selling shares in it, however, there is plenty of choice on the market.
Comparing VCTs and pension wrappers
This varies significantly from the tax-relief dynamics of a pension wrapper, where the tax-relief and investment are locked in until drawdown. The current minimum drawdown age is 55 years old, rising to 57 in 2028.
Age restrictions also afflict pension investors on the way in – income tax relief on a pension contribution is only available for those below the age of 75. Happily, VCT investors suffer no such discrimination; anyone above the age of 18, as long as they’re paying income tax in the UK, can qualify for income tax relief when they buy new shares in a VCT.
Another distinction between a VCT and pension is that only 25% of the pension is tax-free when first withdrawn – known as the Pension Commencement Lump Sum (PCLS). Further withdrawals, whether as lump sums or income, are taxed at the marginal rate of income tax. In comparison, all VCT income is 100% tax-free up to an astonishingly high annual allowance of £200,000. There is also no CGT on realisations.
On the surface, VCTs may seem like a complex product. However, for those who take the time to understand their structure and benefits, they emerge as a powerful, tax-efficient diversification tool that offers investors a stake in some of the UK’s most innovative growth businesses. In the wake of recent tax reforms, their appeal has only grown, making them a timely and strategic choice for forward-thinking investors.
There are currently a number of high quality VCTs on offer, including Pembroke VCT and Albion VCTs.
This article was featured in our Venture Capital Trusts (VCT) Annual Report 2025, which you can read in full here.
About Peter Hicks
Peter Hicks is a research analyst at Chelsea Financial Services. He joined the firm in 2017, having graduated from the University of Edinburgh in 2013 with an MA in Ancient History. Peter also holds an MSc in International Business from the University of Dundee. Within Chelsea FS, he is responsible for VCTs and other tax efficient investments. He holds the IMC and is currently studying towards the Diploma in Regulated Financial Planning.
