In an exclusive interview with Tax-Efficient Investment (TEI) Magazine, Ewan MacKinnon, Managing Partner at Maven looks ahead to the start of a new tax year.
With investors rushing to secure Venture Capital Trust (VCT) allocations ahead of the expected reduction in the 30% income tax relief, Ewan outlines what is currently driving the surge in VCT investment, how the relief reduction might affect investor demand and the ways in which lower relief levels could impact the net cost of investing.
Ewan also reveals why VCTs continue to appeal to higher rate and additional rate taxpayers, along with some of the alternative investment options outside of VCTs.
TEI: What is driving the current surge in VCT investment among private investors?
EM: While it may be overstating things to describe the current environment as a ‘surge’, there has certainly been increased investor appetite for Venture Capital Trusts over recent years.
VCTs offer a unique combination of tax advantages for UK investors, including 30% upfront income tax relief, tax free dividend income and exemption from capital gains tax on disposals. In a period where many other tax efficient investment options reduced, this combination remains particularly attractive.
The VCT sector has also matured considerably. Many established VCTs now have long term performance records and diversified portfolios of growth stage UK companies, managed by specialist investment teams with deep experience in identifying and supporting early-stage businesses. That level of portfolio diversification and active portfolio management can help mitigate the risks traditionally associated with growth investing.
Finally, VCTs provide investors with exposure to innovative British businesses across sectors such as technology, advanced manufacturing, and consumer services, allowing investors to support the growth of the UK’s entrepreneurial economy while adding an additional level of diversification to their investment portfolio.
TEI: How might the relief reduction change investor demand, subscription timing and portfolio allocation?
EM: It is difficult to predict investor behaviour, as allocations will take account of more than simply the tax reliefs. When the initial income tax relief for VCTs was reduced to 30% in 2006, the market did experience a period of lower fundraising, with subscriptions falling for several years before gradually recovering. We would expect a similar initial pattern following the imminent reduction in relief.
However, it is important to recognise that even at 20% relief, VCTs would remain one of the most attractive tax efficient investment options available to UK private investors. When combined with tax free dividends and CGT exemption, alongside the opportunity to access professionally vetted opportunities in some of the UK’s most dynamic emerging companies, the overall investment profile remains compelling relative to many other investments.
Over the longer term, investor demand is likely to continue to be influenced by a combination of factors including tax efficiency portfolio diversification and the potential for income generation.
TEI: In what ways could lower relief levels affect the net cost of investing?
EM: Although the reduction in upfront tax relief will clearly increase the effective net cost of investment for investors, it is important to view this in the context of the overall investment proposition. Even with a reduction to 20% income tax relief, VCTs would still provide a meaningful tax saving at the point of investment, alongside tax free dividends and exemption from capital gains tax, and are structured to allow significant risk mitigation through portfolio diversification and expert asset selection.
As with any asset class, investors also need to consider the underlying costs of managing the investment. Venture capital investing is inherently resource intensive. Managers undertake extensive sourcing, due diligence and portfolio construction work when selecting investments, and typically remain closely involved with portfolio companies through board representation and strategic support as those businesses scale.
This active approach reflects the nature of the asset class. Investing in growth stage private companies requires significantly more hands-on engagement than investing in publicly listed equities. However, it is this proactive portfolio management that is crucial in driving value creation across a VCT portfolio.
TEI: Why might VCTs continue to appeal to higher rate and additional rate taxpayers?
EM: Over recent years the range of tax efficient investment options available to UK investors has narrowed. Successive reductions in dividend allowances and capital gains tax exemptions, alongside restrictions on pension contributions for higher earners, have increased the demand for alternative tax efficient structures.
Against that backdrop, VCTs remain one of the most attractive options available. From April 2026 they will still offer upfront income tax relief of 20%, tax free dividends and exemption from capital gains tax on disposal.
For higher and additional rate taxpayers in particular, the ability to generate tax free income from VCT dividends can be an important component of portfolio construction. Many established VCTs have long track records of distributing regular tax-free dividends, which can make them an appealing complement to other income producing assets.
Similarly, the ability to obtain 20% initial tax relief, often within a short period of making the investment, is an extremely valuable tool in offsetting large tax liabilities but also taking advantage of the ability of experienced VCT managers to significantly mitigate the investment risk. In addition, investors gain exposure to a diversified portfolio of innovative UK growth companies managed by specialist venture capital teams, which can provide access to parts of the economy that are otherwise difficult for private investors to reach.
TEI: If investors choose to avoid VCTs, what alternative investment options might they consider?
EM: For investors seeking tax efficient exposure to early stage and growth companies, the Enterprise Investment Scheme (EIS) is often considered alongside VCTs. EIS investments offer higher upfront income tax relief of 30% and additional tax advantages, including capital gains deferral and potential inheritance tax benefits.
However, the two structures serve different purposes within a portfolio. EIS investments are typically concentrated in a smaller number of earlier stage companies and therefore carry a higher risk profile than VCTs which have more diversified portfolios. VCTs are also listed investment companies with independent boards. That structure provides an additional layer of governance.
For that reason, many investors view VCTs and EIS as complementary rather than interchangeable. VCTs can provide diversified exposure and income potential, while EIS investments can offer higher potential returns alongside higher risk.
Ultimately, the appropriate structure will depend on an investor’s objectives, risk tolerance and time horizon. For many investors, will VCTs remain an attractive option because they combine valuable/attractive tax efficiency with diversification and professional management of a portfolio of high growth UK businesses.
Ewan MacKinnon
Ewan is the Managing Partner at Maven and fund manager for the Maven VCTs. He sits on Maven’s Investment Committee and is Chair of the Valuation Committee. He has more than 25 years’ experience managing, advising and investing in SMEs, and joined Maven in 2009 having worked in Johnston Carmichael’s corporate finance team.
Ewan has extensive industry experience, having previously been managing director of MacKinnons of Dyce Limited, a specialist retail business, which he led through to its sale to a FTSE 250 listed company in 2006. Ewan graduated with a BA (Hons) in Business Studies from the Aberdeen Business School and is a Fellow of the Association of Chartered Certified Accountants.
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