Venture Capital Trusts: A tax-efficient investment option

Venture Capital Trusts (VCTs) provide an effective way for independent UK investors to grow their wealth in a tax-efficient manner while supporting small, high-growth businesses.  

By pooling money from investors, VCTs fund early-stage companies that have the potential for substantial growth, offering a unique combination of diversification, tax reliefs and growth opportunities. 

What are the benefits of VCTs for investors?  

There is a range of benefits available to investors looking to put their money into VCTs, including:  

• Income Tax relief – VCTs offer 30 per cent income tax relief on investments up to £200,000 per tax year (be aware that this rate falls to 20 per cent from April 2026). To qualify, shares must be held for at least five years. This relief can significantly reduce your income tax bill, making VCTs an attractive option for high-net-worth individuals looking to maximise their tax efficiency. 

• Tax-free dividends – Any dividends paid out by VCTs are tax-free. This is particularly advantageous for investors seeking regular income without the burden of tax deductions, making it an appealing choice for those looking to generate passive income in retirement or as part of a diversified portfolio. 

• Capital Gains Tax (CGT) exemption – Capital gains from the sale of VCT shares are exempt from CGT. This means that any profit you make from selling your shares in a successful VCT will not be subject to tax, potentially leading to significant tax savings, especially if your investments perform well over time.  

• Share buyback – Many VCT managers offer a guaranteed share buyback after five years at a discount to Net Asset Value (NAV) – the total value of the VCTs underlying assets, minus all its liabilities – which can then be reinvested into another VCT to benefit from further tax relief.  

Why consider investing in VCTs? 

Alongside the immediate tax benefits, there are also other good reasons to choose VCTs: 

• Supporting UK innovation – VCTs are specifically designed to fund small, high-growth businesses, many of which are at the forefront of innovation in sectors like technology, healthcare and green energy. By investing in a VCT, you are directly contributing to the success of these businesses, which can help drive economic growth and job creation in the UK. 

• Diversification – VCTs allow you to spread your investment across a range of small, emerging companies, reducing the risk of having your capital tied up in a single business. This diversification can protect your portfolio from the failure of any one company, while still providing exposure to high-growth opportunities. 

• Growth potential – While VCTs are higher risk due to their focus on early-stage businesses, they offer the potential for significant returns if these businesses succeed. Investors in VCTs are essentially backing the next generation of UK businesses, many of which may grow rapidly and provide substantial capital gains. 

VCTs are considered high-risk investments because they invest in smaller, less established companies that are more likely to fail. These businesses can be volatile and there’s no guarantee that your investment will see positive returns.  

Additionally, VCTs are illiquid investments, meaning they cannot easily be sold on the open market like publicly traded stocks. Investors should be prepared to hold their investment for several years and consider their risk tolerance before committing to a VCT. 

To invest in a VCT, it’s important to research different funds to find one that aligns with your investment goals and risk profile. Some VCTs focus on specific sectors, while others offer more general diversification.  

How can we help

It’s also advisable to consult with a financial adviser, who can help you understand the complexities of VCTs and how they can fit into your overall investment strategy. 

A financial adviser can guide you through the process of selecting a VCT, help you understand the tax benefits and ensure that the investment complements your long-term financial goals.  

Given the tax reliefs associated with VCTs, working with a professional can help maximise the benefits and ensure that you are taking advantage of all available tax-saving opportunities. 

If you’re interested in exploring VCTs as part of your investment strategy, Get in touch with Director, Andrew Tricker (andrewtricker@lfwm.co.uk) 

The information included in this article may be subject to changes in taxation following its publication. This article is intended for informational purposes only and does not constitute advice. The Financial Conduct Authority does not regulate estate planning.