Tax Relief on Second-Hand VCT Shares

Venture capital trusts (VCTs) are investment companies that invest in small UK businesses. They are structured as investment trusts, which means their shares can be bought and sold on the secondary market, just like any other listed company. But the tax treatment of second-hand VCT shares is different from newly issued ones.

If you buy VCT shares on the stock market rather than in a fundraising, you cannot claim the upfront income tax relief on your investment. That relief is only available on new issues. What you do keep is the tax-free dividend income and the exemption from capital gains tax on disposals. Those follow the shares themselves, not how you acquired them.

The income tax relief rate on new VCT shares is 20%, reduced from 30% from 6 April 2026¹. The relief is capped at the first £200,000 you invest in a single tax year³. Around 24,000 individuals are affected by the reduction in the relief rate¹.

What second-hand VCT shares are

A VCT is a company listed on the London Stock Exchange. When a VCT raises money, it issues new shares to investors, often through a platform or the VCT manager. Those are the shares that qualify for income tax relief. Once those shares are in investors' hands, they can be sold on. Anyone who buys them at that point is buying on the secondary market.

The distinction matters because the tax reliefs attached to VCTs are not all the same. Some are tied to the act of subscribing for new shares. Others are tied to the shares themselves. The income tax relief is in the first category. The dividend exemption and the capital gains exemption are in the second.

VCTs must hold at least 80% of their investments in qualifying investments, which are small companies with a maximum of £30 million in gross assets before they issue shares⁴. The remainder, up to 20%, is usually kept in cash but can be invested in other investments⁴. The gross assets limit for companies receiving investment under the VCT scheme rose to £35 million from £16 million immediately after the issue¹.

VCTs invest in some of the most dynamic small businesses in the UK, with government tax benefits for investors⁸. The government offers generous tax benefits when you invest in VCTs⁹. But those benefits come with conditions, and one of the most important is how you buy the shares.

Dividends on second-hand VCT shares are tax-free

The tax-free dividend treatment applies to VCT shares regardless of whether you bought them new or second-hand. If you buy shares on the secondary market, you cannot get tax relief on your initial investment, but tax-free income and capital gains are still available⁴.

This is the key point for anyone considering second-hand VCT shares. The income stream is tax-free. Any profit is paid out to the VCT investors as a tax-free lump sum dividend and the original capital is reinvested¹⁰. VCTs are exempt from capital gains tax on disposals during lifetime or on death⁷.

The tax-free dividend treatment is not means-tested and there is no annual cap on the dividends you can receive. The £200,000 limit applies to the income tax relief on new subscriptions, not to the dividends themselves. Once you own VCT shares, the dividends they pay are tax-free in your hands.

You do not need to declare VCT dividends or capital gains on your tax return¹¹. If you are claiming income tax relief on new VCT shares, you do need to claim that relief through your Self Assessment, but the dividends themselves stay off the return⁵.

Reliefs that apply only to newly issued VCT shares

The income tax relief is the main relief that is lost when you buy second-hand. Only investments made in new issues of VCTs qualify for the tax relief, not shares bought on the London Stock Exchange⁵. To qualify for the tax breaks, you must buy newly issued VCT shares, which means buying from the VCT manager or a platform when the VCT is fundraising³.

The rate of income tax relief on new VCT shares is 20%⁴. This was reduced from 30% from 6 April 2026¹. The relief is capped at the first £200,000 you invest in a single tax year³. You can only claim relief on that amount, regardless of how much more you invest.

If you sell your VCT shares within five years of the date of issue, you will need to contact HMRC and repay any upfront tax relief claimed³. If you sell your VCT shares within five years of purchase, you may have to repay any income tax relief you originally claimed¹³. This clawback rule applies to the shares that qualified for relief, not to second-hand shares that never qualified.

The HS298 helpsheet covers disposal relief, deferral relief, when the deferred gain is revived, how deferral relief fits in with disposal relief, takeover of the VCT, and bonus or rights issue by the VCT¹⁴. It explains capital gains aspects of the VCT scheme for investors and helps you fill in the capital gains summary pages of your tax return¹⁴.

Buying and selling VCT shares on the secondary market

VCTs are structured as investment trusts, and so they can be bought and sold on the secondary market, but any such purchases do not offer the same tax benefits³. That is the trade-off. You get liquidity and the ability to buy at a market price, but you lose the upfront relief.

It can be difficult to sell VCT shares to other investors on the stock market as you would with other shares, although some VCTs offer a buy-back facility⁴. This matters for anyone thinking about how they would exit. If you trade VCT shares electronically you may end up receiving a price at a large discount to the net asset value¹⁵.

Investment trust shares tend to trade at a discount to NAV more often than not⁹. For VCTs, the discount can be wider because of the difficulty in selling and the fact that buyers are not getting the upfront tax relief. The market price reflects what buyers are willing to pay, and that is often less than the underlying value of the assets.

Where the tax treatment of VCT dividends does not help

The tax-free dividend treatment is valuable, but it does not solve every tax problem. VCTs are typically very high-risk investments, where losses could eclipse tax savings⁷. The tax benefits are generous, but they do not protect you from losing money.

If the VCT itself does not comply with a range of conditions, both the VCT and the investors lose all the tax benefits⁴. That is a risk that sits with the VCT's management, not with how you bought the shares. But it is worth knowing that the tax treatment depends on the VCT maintaining its qualifying status.

On death, the treatment of VCT shares depends on who inherits them. Where a spouse inherits the VCT, this would be an exempt transfer for inheritance tax too, and the income tax relief would not be repayable in this scenario⁷. That is a specific relief for spouses, not a general inheritance tax exemption for VCT shares.

The tax-free dividends also do not help if you have no tax to pay on dividends anyway. The dividend allowance means many investors pay no tax on dividends up to a certain level. For those investors, the VCT dividend exemption adds nothing they were not already getting. The value of the exemption depends on your overall tax position.

Claiming relief and getting help

If you have bought new VCT shares and want to claim the income tax relief, you have three options: submitting a Self Assessment tax return, contacting HMRC to adjust your PAYE tax code, or sending your VCT tax certificate to HMRC and requesting a tax refund³.

On a paper return, you provide the total amount of all your VCT subscriptions you are claiming for in the part marked "Subscriptions for Venture Capital Trust shares" and return the sheet with your tax return using the Additional information sheet (SA101)¹¹. Online, you answer "Yes" to the question on other tax reliefs, then under "Other tax reliefs and deductions" provide the total amount of all your VCT subscriptions and details of your VCT investments via the "Tailor your return" section¹¹.

Tax reliefs you can claim on your Self Assessment tax return include Community Investment Tax Relief, subscriptions for shares under the Enterprise Investment Scheme, tax relief on private pension contributions, and tax reliefs on investments¹⁶. VCT relief sits alongside these.

For help with VCT tax questions, HMRC provides the HS298 helpsheet, which explains the capital gains aspects of the VCT scheme¹⁴. A tax adviser or accountant can help with your individual circumstances. The VCT manager or platform you bought through can also provide a tax certificate for relief claims.