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Venture Capital Trusts, or VCTs, have been part of the UK investment landscape for more than 30 years, giving private investors access to portfolios of smaller, growing businesses alongside a range of tax benefits.
From 6 April 2026, the rate of income tax relief available on qualifying new VCT shares reduced from 30% to 20%. This change was made as part of a package of measures which also widened the pool of companies which VCTs can invest in to include later-stage scale up companies.
Other changes introduced at the same time included increasing the amount of capital that qualifying companies can raise from VCTs, giving managers greater scope to continue supporting successful businesses as they grow. The annual and lifetime investment limits doubled, while the gross assets thresholds also approximately doubled.
VCTs can therefore still provide access to professionally managed portfolios of growth companies, diversification beyond mainstream listed investments and tax-free dividends, alongside the initial income tax relief and exemption from capital gains tax.
So, where might they fit within a client’s wider financial plan?
Access to a professionally managed portfolio of growth companies
Investing directly in smaller private companies is not straightforward. Individual opportunities can be difficult to access and assess, while building and managing a sufficiently diversified portfolio requires considerable time and expertise.
A VCT provides access to a portfolio selected and managed by a professional investment team. The investment manager is responsible for finding potential investments, assessing each opportunity, carrying out due diligence and negotiating the terms on which an investment is made.
That relationship normally continues after the investment has been made. VCT managers will often take board positions and work with management teams as companies grow, supporting areas such as strategy, recruitment, international expansion and future fundraising before eventually working towards an exit.
For clients, this provides a way to gain exposure to smaller growth companies without having to source, assess and manage individual private company investments themselves.
Diversification beyond mainstream investments
For clients who have already built a diversified portfolio across more traditional asset classes, VCTs can provide exposure to a different part of the market.
Rather than investing in a single company, an investment in an established VCT provides exposure to its wider portfolio, which may include businesses operating across different sectors and at different stages of development.
This does not remove the risks associated with investing in smaller companies, and VCTs should normally form part of a broader portfolio rather than replace more mainstream investments. However, spreading capital across a portfolio means the investment is not dependent on the performance of one underlying business.
Different VCTs take different approaches. Generalist VCTs invest across a range of sectors, while specialist and AIM VCTs provide more targeted exposure, giving advisers an opportunity to consider which approach is most appropriate within a client’s existing portfolio.
Tax benefits remain important
Tax treatment has always been an important part of the VCT proposition, reflecting the higher risks involved in investing in smaller and less established companies.
For qualifying new VCT shares issued from 6 April 2026, investors can claim 20% income tax relief on investments of up to £200,000 in a tax year, provided they have sufficient income tax liability and meet the relevant qualifying conditions.
To retain the initial relief, the shares must be held for at least five years.
There are also two further tax benefits:
- Tax-free dividends, which can provide a source of tax-efficient income, although the amount and frequency of any dividends are not guaranteed.
- No capital gains tax on gains when VCT shares are sold, subject to the relevant conditions.
For advisers, the initial income tax relief is therefore only one part of the picture. Depending on a client’s circumstances and investment objectives, tax-free dividends and the exemption from capital gains tax may also be relevant when considering the role a VCT could play.
Tax rules and rates are subject to change, and the availability of tax relief will depend on individual circumstances and the relevant qualifying conditions.
Tax-efficient income
The tax treatment of VCT dividends can make them particularly relevant for some clients looking to generate income from their investment portfolios.
Dividends paid by VCTs are free from income tax, meaning the amount received is not added to the investor’s taxable income. This differs from many other income-producing investments held outside tax wrappers, where dividends or interest may create an additional tax liability.
For clients who have already made use of their ISA allowance or are considering how to structure income across different investments, this can be an attractive feature.
However, VCT dividends are not guaranteed and will depend on factors including the performance of the underlying portfolio, available reserves and the dividend policy of the individual VCT. They should not be treated as a guaranteed source of income.
Where might VCTs fit within financial planning?
VCTs will not be appropriate for every client. They are higher-risk, long-term investments and need to be considered in the context of an individual’s wider financial position, objectives and capacity for loss.
For suitable clients, they may be relevant for those who:
- Have made use of their ISA and pension allowances and are looking for additional tax-efficient investment options.
- Have a significant income tax liability, where the 20% initial income tax relief may be relevant.
- Are considering tax-efficient income, as VCT dividends are free from income tax, although they are not guaranteed.
- Already have an established, diversified portfolio and are comfortable allocating a proportion to higher-risk investments in smaller growth companies.
- Are able to invest for the longer term without expecting to need access to the capital.
What should advisers look for in a VCT?
Tax relief can make VCTs attractive, but it should not be the only reason for investing.
The quality of the manager, its investment strategy and track record, the diversification of the existing portfolio and the approach taken to supporting and eventually exiting investments are all important considerations when comparing VCTs.
Advisers may therefore want to consider questions such as:
- How experienced is the investment team and how long has it worked together?
- How does the manager source and select new investments?
- How diversified is the existing portfolio?
- What is the manager’s approach to follow-on investment and portfolio support?
- What track record does it have of successfully realising investments?
- What is the VCT’s dividend policy and how has it historically been funded?
- What are the charges and how could they affect returns?
- What options are available to shareholders who eventually want to sell?
The changes introduced from April 2026 make some of these questions particularly relevant. The higher company investment limits give VCT managers more scope to continue backing successful businesses as they scale, so an adviser may also want to understand how a manager approaches follow-on funding and decides when to commit further capital.
Understanding the risks
The benefits of VCT investment need to be considered alongside the risks.
VCTs invest in smaller, less established companies, which can be more volatile and have a greater risk of failure than larger businesses. Investors could lose some or all of the capital they invest.
VCT shares can also be difficult to sell and may trade at a discount to their underlying net asset value. Investors should therefore be prepared to hold them for the longer term, while those selling qualifying new shares within five years will have to repay the initial income tax relief.
Tax rules and VCT legislation can also change, and the availability of relief depends on both the VCT and the investor continuing to meet the relevant conditions.
These factors mean VCTs will generally be most appropriate as one part of an already diversified portfolio for clients who understand and can accept the additional risks involved.
Important Notice
For professional advisers only.
This article is for information purposes only and does not constitute investment, tax, financial or legal advice. It does not constitute an offer to buy or sell an investment or solicit any such invitation.
The information is believed to be accurate at the date of publication, but no representation or warranty, stated or implied, is made or given by any person as to its accuracy or completeness and no responsibility or liability is accepted for any such information or opinion. Tax treatment depends on individual circumstances, and tax rules may change.
Issued by Beringea LLP of Charter House, 55 Drury Lane, London, England WC2B 5SQ. Registered in England and Wales under number OC342919. Authorised and regulated by the Financial Conduct Authority under number 496358.
