For decades, the financial adviser’s toolkit for high-net-worth clients relied on a familiar tripod: pensions for the long term, ISAs for flexibility, and a General Investment Account for the rest. Stuart Mant, Head of Business Development, Albion Capital, helps digest the implications of the recent UK Budget, and says that it is clear that the legs of that particular tripod are being shortened.
With Capital Gains Tax rates rising to 24% for higher earners, the dividend allowance remaining frozen at a negligible £500, and pensions set to be dragged into the inheritance tax net from 2027, the traditional avenues for wealth preservation are narrower than they have been in a generation.
We are witnessing a structural shift. The combination of fiscal drag, reduced allowances, and sticky inflation means that simply ‘preserving’ wealth in traditional vehicles is no longer enough to generate real returns. For advisers, this creates a new urgency: where can we find tax efficiency that doesn’t sacrifice growth potential?
This brings us to Venture Capital Trusts (VCTs). Once viewed as a satellite holding for the adventurous, VCTs are rapidly moving toward the core of the high-net-worth portfolio, not just as a tax shelter, but as an essential engine of growth in a stagnating public market.
The Budget Trade-Off
The Chancellor’s announcement in November delivered a distinct ‘before and after’ moment for the VCT sector.
The Government has effectively presented the industry with a trade-off. They have confirmed that from April 2026, the upfront income tax relief on new VCT investments will reduce from 30% to 20%. However, simultaneously, they are modernising the scheme by doubling the investment limits (raising the lifetime cap per company to £24m, and £40m for knowledge-intensive companies).
This is a move the industry has long campaigned for under the Growth Beyond Limits campaign. It rightly identifies that British companies need support for longer to compete on the global stage.
However, the cut to relief poses a question about future incentives. While the industry, led by the VCTA, is actively engaging with the Treasury to challenge the relief cut through the newly announced ‘Call for Evidence’, advisers must deal with the landscape as it stands today.
This creates a unique golden window for the current tax year (2025/26). Advisers have a limited-time opportunity to secure the current 30% relief rate for their clients, while investing into funds that are preparing to utilise the new, higher investment limits to back their winners for longer.
A Macro Shift: Public Markets Are No Longer Enough
Beyond the tax changes, the investment case for VCTs is being driven by a shift in public markets. Public equities have become increasingly concentrated and volatile, with global tracker investors rotating out of rate-sensitive large-cap tech and into broader value plays. Meanwhile, UK inflation, though cooling, remains a threat to real returns on cash.
VCTs offer a counter-cyclical alternative. By investing in unquoted, early-stage UK companies, VCTs provide exposure to an asset class that is fundamentally less correlated with the daily sentiment swings of the FTSE or the S&P 500. We are looking at companies solving structural problems in digital health, cybersecurity, software and fintech, whose growth is driven by innovation rather than macroeconomic tides.
The decision to double the investment caps from 2026 acknowledges that companies are staying private for longer. Value creation is now happening in the private sphere, and VCTs are the only vehicle that gives retail investors liquid access to this growth engine.
The Tax Buffer: A Safety Net for Risk
Advisers often hesitate to recommend VCTs due to the perceived risk profile of early-stage equities. This is prudent; venture capital is inherently risky. However, this view often ignores the structural ‘buffer’ that the VCT tax regime provides, particularly in this current tax year.
The upfront income tax relief does more than just reduce a tax bill. It alters the risk-return profile of the investment, acting as a cushion against volatility. This means that the underlying portfolio companies have the time and space to grow, recognising that the path to success is not always a straight line.
For the remainder of the 2025/26 tax year, this buffer remains at 30%. For a client investing £10,000 today, the net cost is immediately reduced to £7,000. This offers advisers a clear, time-limited opportunity to secure the higher rate for clients while gaining exposure to funds that will benefit from the modernised investment limits of the future.
Looking ahead to 2026, even at a reduced rate of 20%, the mechanism remains the same. However, as an industry, we argue that the 30% rate is the optimal level to drive the necessary investment flows to achieve the government’s growth agenda.
Aside from that, when that portfolio performs, the tax-free nature of the dividends becomes the adviser’s most valuable tool. With dividend allowances essentially evaporating for general shareholders, the ability to generate a target 5% tax-free yield is a game changer for income-seeking clients.
The Investment Case Beyond Tax
While tax relief is the hook, the investment case must stand on its own. At Albion Capital, we have managed VCTs for nearly 30 years. We have seen the scheme evolve over the years, including new tax rates, and have long argued that tax relief should be the icing on the cake, not the cake itself. The constant is that returns drive investor satisfaction.
The UK venture ecosystem has matured significantly. The sector has professionalised, shifting towards high-conviction, thematic investing in mission-critical software and healthcare. The new, higher investment limits will allow managers to double down on this strategy.
Previously, VCTs were forced to stop investing once a company had raised £12m in state-aided capital, often forcing successful UK companies to seek capital from US investors, diluting the VCT shareholders just as the company entered its scale-up phase. The new £24m limit solves this.
This potential is best illustrated by our acorns to oaks philosophy. VCTs allow clients entry-level access to companies often overlooked by public markets and hold them through their growth curve.
- Success Story: Quantexa. We first invested in this decision intelligence company in 2017. Today, it is a UK unicorn valued at £2 billion, used by major banks and governments to fight financial crime. VCT investors participated in that growth journey, but under old rules, our ability to follow on was capped. Future ‘Quantexas’ will be able to receive VCT backing for longer, keeping that value in the hands of UK retail investors.
- Success Story: Egress. In July 2024, we exited Egress, a cybersecurity champion, to KnowBe4. This exit returned at 7.6x cost and over £64m back to our funds.
These numbers represent real wealth creation that is free from Capital Gains Tax. For an adviser, pointing to a tangible success story like Egress validates the decision to allocate away from the mainstream. Exits like Egress demonstrate liquidity. A common concern post-Budget is whether the future cut in relief will dry up funding. However, mature VCT managers do not rely solely on new fundraising; we rely on a proactive exit programme to replenish capital and support the portfolio.
Practical Application in the 2026 Portfolio
So, how should advisers practically incorporate this into a client offering?
1. The Pension Top-Up
With the Lifetime Allowance abolished, focus has shifted to the tax-free lump sum cap firmly in place (frozen at £268,275) and the inclusion of pensions in IHT from 2027. High earners are incentivised to look for tax-efficient vehicles outside the pension wrapper. With an annual allowance of £200,000, VCTs offer significant headroom for clients who have maxed out their pension contributions but still have taxable income to offset.
2. The CGT Refugee
The increase in Capital Gains Tax rates (up to 24% for residential property and higher earners) makes the tax-free nature of VCT gains more valuable. Clients with significant unwrapped assets may be looking to crystallise gains now: reinvesting into a VCT can help mitigate the ongoing tax drag of a GIA portfolio.
3. The Income Supplement
For clients in drawdown, managing the taxable portion of their income is a delicate balancing act. VCTs target a 5% tax-free yield (variable and not guaranteed). Using this tax-free stream to supplement taxable pension income can keep a client in a lower tax bracket effectively.
Looking Ahead: Certainty in Uncertain Times
The Government’s reduction in tax relief to 20% from 2026, but doubling the investment limit, is a head scratcher for most; however, it will allow for VCTs to become more effective scale-up vehicles, backing larger, more established companies for longer.
For the investor sitting in front of an adviser today, the immediate reality is simpler. We are in a transitional period. The opportunity to lock in 30% relief remains available for the rest of this tax year. The risks of not diversifying, and the costs of remaining solely in traditional taxable wrappers, have risen dramatically.
For the adviser, the VCT is no longer just a tax product; it is a gateway to the innovation economy and a way to offer clients a stake in the next generation of British success stories, buffered by relief and sustained by tax-free income.
This piece featured in this year’s annual issue of Tax-Efficient Investment (TEI) Insights, which you can read here!
About Stuart Mant
Stuart has been with Albion since 2012, where he focuses on the distribution of the firm’s VCT offerings to Wealth Managers, Private Banks, and Family Offices. With a background spanning equity, fixed income, and venture capital, Stuart previously held senior positions at several leading fund management houses.
