Alex Davies, founder and CEO of Wealth Club, examines the implications of the Budget’s surprise cut to VCT tax relief and asks whether advisers should act now to secure the current 30% rate for clients.
A quietly announced change in the 2025 Budget could have far-reaching consequences for the Venture Capital Trust market. With upfront income tax relief set to fall from 30% to 20% from April 2026, Alex Davies, Founder and CEO of Wealth Club, explores whether history is likely to repeat itself, and why advisers may want to act sooner rather than later when considering VCTs for suitable clients.
Nobody saw it coming. Buried on page 74 of the Budget 2025 document – amidst the fanfare about the government’s support for entrepreneurship and innovation – was the announcement that the upfront VCT income tax relief is being cut from 30% to 20%, effective from 6 April 2026.
The last time the rate of VCT tax relief was reduced – from 40% in 2005/06 to 30% in 2006/2007 – the amount invested in VCTs dropped by two-thirds1.
Whether or not history will repeat itself this time round remains to be seen.
But there is a much more pressing question today: should investors double down on VCT investments now, to lock in the tax relief at the current rate of 30%?
If you were already considering VCTs for some of your clients, it would probably be foolish to delay. For everyone else, it may be worth taking a closer look at what VCTs are, their benefits and risks and what part they could play in a portfolio.
A quick reminder on VCTs
As most advisers will know, VCTs, or Venture Capital Trusts, are companies that invest in young and ambitious, usually privately-owned, businesses.
Introduced in 1995, they are based on a simple idea: these companies are the lifeblood of the economy. The successful ones create tons of jobs (usually quite well-paid jobs), pay lots of taxes, drive innovation and foster competition. According to the VCT Association, VCT-backed companies employ over 106,000 people, earning higher-than-average salaries.
The more these companies grow, the greater their positive impact and contribution to the economy, and the more everybody, including the government, benefits.
Funding is essential to fuel this virtuous circle of growth and impact. And this is why the government offers very valuable tax incentives when private investors invest in VCTs and provide growth capital to hundreds of young companies.
Up to 30% income tax relief and tax-free dividends
Investors could receive up to 30% income tax relief under current rules, effective until the end of this tax year.
In addition, any dividends VCTs pay are tax-free. For context, VCTs tend to pay dividends of around 5% – though this can be much higher or lower.
If a VCT pays a 5% dividend, to match that, assuming the dividend allowance has already been used, a higher-rate taxpayer would have to get a taxable dividend of 7.55% (8.24% for a top-rate taxpayer). And that is before taking into account the 2% increase in dividend tax kicking in on 6 April 2026, as announced in the Budget.
Do VCTs stack up as an investment?
In addition to the valuable tax savings, VCTs have historically produced solid returns – past performance is not a guide to the future.
In the 10 years to September 2025, the 10 largest generalist VCT managers have delivered an average NAV total return of 58.1% (assuming dividends are reinvested).
Despite a challenging environment in the last few years, there are promising signs. VCT-backed companies continue to grow at a faster rate than their listed counterparts.
Wealth Club analysts have looked at the portfolio companies of 36 VCTs, together accounting for around 94% of the assets of all active VCTs. Over a third (36.8%) of their investments are in businesses that have grown revenues by more than 25% year on year. By contrast, only a tiny minority (2.1%) of the FTSE All Share constituents, excluding investment trusts and insurance companies, have achieved that. The comparison is even more favourable if we look at companies growing revenues 50%+ a year: the percentages are 18.1% for VCTs versus just 0.5% for the main market.
Within that trend, there are some truly notable success stories.
One is Albion VCTs’ largest investment, Quantexa. The big-data analytics firm uses artificial intelligence to uncover hidden relationships and emerging risks, helping financial institutions spot and prevent fraud. It was established in 2016 and in 2024 achieved Centaur status, surpassing $100 million in Annual Recurring Revenue (ARR) and joining an elite group of SaaS companies.
Another example, in a completely different sector, is Pembroke VCT’s largest investment, LYMA Life, which created the world’s first clinical-grade, FDA-approved skin laser device for home use. LYMA Laser was named one of TIME Magazine’s Best Inventions of 2023. The company most recently reported a 40% year-on-year increase in revenue.
Very different again, Proven VCTs-backed MPB is the largest global platform for buying, selling and trading used photo and video gear. In its latest accounts, the company reported a growth rate of 40%, with more than 65% of revenue now generated outside the UK.
All three companies have consistently grown, year in, year out – a pocket of brilliance within the wider VCT growth story.
Overall, VCTs remain a credible and compelling option for growth-seeking investors.
The smaller, usually private UK companies that VCTs back are generally inaccessible through mainstream investment funds. That means VCTs can also help add diversification to client portfolios by providing exposure to a different set of opportunities.
What are the main risks?
Statistically, small, young companies are more likely to fail than their larger counterparts. If you take 100 small companies, chances are only a handful will turn into great successes. The majority will achieve modest growth, just bumble along or fail altogether.
So, when advising a client to invest in VCTs, it is crucial to stress to them that it is possible they will lose some or potentially all their investment. But that is what the tax relief is for. It rewards investors for backing companies that grow the economy and create jobs. And it helps reduce the pain when some don’t make it.
Also, as advisers will know, despite technically being listed shares, VCTs are quite illiquid. After five years – the minimum investment period to retain the income tax relief – shares could in theory be sold on the secondary market, but that would usually involve selling at a discount to the value of the underlying investments. An alternative is to take advantage of a VCT’s share buyback facility, where the manager buys back shares from shareholders at a fixed discount (usually 5% to 10%) at regular intervals.
Who should invest in VCTs?
VCTs are not for everyone. They will only be appropriate for some clients – typically higher earners with an established mainstream investment portfolio – after using the ISA and pension allowances.
They could be particularly relevant to clients affected by the reduced pension allowances, because they maxed out what they can contribute, have taken the pension tax-free cash or have little earned income.
They could also be a consideration for clients at retirement, as an additional source of tax-free income, buy-to-let landlords facing increased taxes or company directors who pay themselves dividends and want to offset some of the ensuing income tax liability.
But caution is essential. VCTs are high-risk and illiquid.
As any adviser will know, diversification is equally important. It makes sense to spread a client’s annual VCT contribution across several managers, with different investment styles and specialisms. Some will perform better than others at any given time, but ultimately, the approach should work in your favour.
One final thought. Each VCT offer has finite capacity: it targets a specific amount to raise, and once that’s reached, it closes. Popular VCTs can and do fill quickly. Even more so if the Budget announcement triggers a spike in demand, and it is entirely conceivable it will. So, if you have clients, you think should invest in VCTs, consider acting quickly.
This piece featured in this year’s annual issue of Tax-Efficient Investment (TEI) Insights, which you can read here!
[1] From £779m to £267 = 66% drop
About Alex Davies
Alex is the founder and CEO of Wealth Club, the UK’s leading online investment platform for high-net-worth and sophisticated investors. Since its launch in 2016, 13,400 clients have invested £1.7 billion into early-stage companies via the platform.
In 2024, Wealth Club broke new ground with the launch of a fund supermarket, giving investors access to top-tier private equity funds – the first offering of its kind in the UK. Before setting up Wealth Club, Alex was a director of Hargreaves Lansdown
