To many observers of the VCT industry, the 2025 Autumn Budget will feel like a missed opportunity. Here, Oliver Bedford, manager of Hargreave Hale AIM VCT, explains the contradictions inherent in the proposed changes to VCT legislation.
An answer to the funding gap
The November Budget delivered a set of new rules that will govern how VCTs invest for years to come. Through its ‘Growth Beyond Limits’ campaign, the VCT Association successfully argued for increases to the value-based limits (annual, lifetime and gross assets) that define which companies can access investment from VCTs.
It was announced at the Budget that the VCT rules were to be updated with the gross assets limit raised to £30 million, the lifetime company investment limit raised to £24 million (£40 million for knowledge intensive companies) and the annual company investment limit raised to £10 million (£20 million for knowledge intensive companies). The Treasury would commit to reviewing these limits every three years.
This welcome news was expected to unlock a wave of new investment that would result in the creation of more domestically originated intellectual property and, with it, more skilled jobs. Capital intensive and research heavy industries most affected by increases in the cost of plants, equipment and labour would be brought back into scope. Think engineering, deep technology, biotechnology and life sciences companies.
The increased limits were expected to address – in part – the UK’s well characterised funding gap, a term that describes the issue faced by many of our most exciting high growth companies as they seek scale up capital beyond what is currently available from VCTs and other state aided investors. Taken together, the proposed changes to the value-based limits will allow VCTs to provide more companies with more capital, and for longer.
A handbrake on growth
However, a VCT’s ability to supply capital into our innovation economy is a function of its own ability to attract capital. Reducing the upfront income tax relief from 30% to 20% with effect from 6 April 2026, as is proposed, will reduce retail investment into the VCT scheme and choke off the supply of capital to our country’s most exciting growth companies. This will counteract the potential benefits of the proposed changes to the value-based limits.
In attempting to quantify the potential impact of the proposed reduction in income tax relief, we can look to history for precedent. In 2006, VCT funding fell by 65% following a cut in the income tax relief from 40% to 30%. A post-Budget survey by Wealth Club, one of the largest distribution channels for VCTs, found that 85% of respondents said they will either invest less in VCTs or not at all (as a consequence of the proposed reduction in income tax relief). Only 13% said they would transfer their future investment from VCTs to EIS or SEIS, which did not suffer from equivalent reductions to their tax incentives.
The net outcome will be, it seems, a smaller but more flexible VCT scheme that will be unable to fulfil its true potential as a source of financial and non-financial support to our growth companies. With less capital, companies will defer or cancel planned investment and future employment.
So why would the government act in such a way? By its own estimates, the Treasury expects to save around £100 million a year. However, the deferral in investment may cost it more.
Growth companies will always try to access capital. Without support from UK investors, our companies will look for capital elsewhere, including from overseas investors. They might seek an early sale rather than attempt to scale within the UK. The UK needs a coherent funding ecosystem that can support our companies as they scale. Without it, we will continue to innovate and originate but fail to scale. Intellectual property and value will be transferred to overseas investors. Talent and opportunity that might have otherwise stayed within our shores will be lost.
Why VCTs matter
In its 30 years, the VCT scheme has matured into an effective channel for investment that uses government funding to crowd in private sector capital. The scheme is meritocratic, performance is transparent and managers are accountable. Backing good companies creates jobs and tax receipts. It also drives performance, which in turn attracts capital. It is success that determines where the government subsidy goes, namely to those who back this country’s future successes and generate the best performance. What better way to ensure that precious taxpayer money is appropriately allocated.
A growth market ripe with value and home to innovation
It has been a difficult period for investors in growth companies listed on AIM, following a protracted near four-year bear market that followed the global reset in interest rates. Higher interest rates catalysed a significant and prolonged rotation away from growth equities. Many markets saw sustained falls as company valuations compressed; the impact was particularly acute on AIM.
However, investors are now looking at the UK markets through a different and more positive lens. With UK equities significantly undervalued, both relative to historical norms and other international markets, the renewed interest has driven gains in UK indices, including AIM. Although there remains a long way to go and the UK’s listed growth companies remain in deep value territory, it is heartening to see the downtrend broken and the market now starting to move forward.
Step away from financial markets and speak to the companies themselves and you will find an underlying vibrancy and pockets of real strength. The UK is brimming with innovation and will continue to produce world leading companies with exciting opportunities for growth. This is where our interest lies.
As a VCT, we want to continue to back innovation and ambition with capital and non-financial support. However, our ability to do so will depend on our own access to capital. The budget proposals can make a real difference to many companies. We urge the government to take the handbrake off growth and reconsider the proposed reduction in income tax relief.
VCTs in practice – some success stories
Qureight – powered by artificial intelligence, Qureight’s market leading technology enables pharmaceutical companies, hospitals, and clinical research organisations to analyse heart and pulmonary medical images, allowing more precise measurement of drug efficacy, lung function, and disease progression. Qureight partners with leading biopharma companies including AstraZeneca, Merck Sharp & Dohme, Calluna, PureTech, Avalyn, and Cumberland Pharmaceuticals among others. Since our investment in April 2024, Qureight has more than tripled its pharma partnerships to 13 and developed five deep-learning lung disease biomarkers.
Gousto – well-known British meal-kit retailer, Gousto was founded in 2012, revolutionising how we buy, prepare and consume food in the 21st century. Today, it’s one of the most tech-driven food companies in the UK, using its proprietary AI engine called ‘The recipe recommendation engine’ to optimise everything from ingredient sourcing to delivery logistics. Since our initial investment the company has grown revenues to £312m and employs over 1,000 people.
Cohort – serving defence and security, offshore energy and other commercial markets, Cohort delivers advanced solutions in areas such as electronic warfare, sonar and underwater communications, satellite communications, cybersecurity, training and simulation and combat systems. In 2025, Cohort completed the £74m acquisition of Australian based satellite communications company EM Solutions. In the 19 years the VCT has supported the company, Cohort has delivered a revenue growth CAGR of 15 per cent. and increased revenues from £18m at IPO to £270m.
Diaceutics specialises in the commercialisation of diagnostic driven therapies. Its proprietary platform integrates diagnostic testing data from a global network of laboratories, enabling pharmaceutical companies to identify eligible patients more effectively. Founded in 2005, Diaceutics now works with many of the world’s leading pharmaceutical companies, supporting the adoption of precision medicines and helping to ensure patients receive the right treatment at the right time. Since IPO the company has more than tripled revenues to £38.5m and is now profitable.
Oliver Bedford
Oliver Bedford graduated from Durham University with a degree in chemistry. He served in the British Army for nine years before joining the Investment Manager in 2004. After initially working as an analyst in support of the VCT, Oliver was appointed as co-manager in 2011 and then lead manager in 2019.
