Venture capital trusts (VCTs): tax relief, rules and risks

A venture capital trust (VCT) is a listed investment trust that raises money from investors and puts it into small, young UK companies, most of which are not quoted on the stock market. In return for backing businesses the government wants to see grow, investors get a package of tax breaks: 20% income tax relief on new shares, tax-free dividends and no capital gains tax on profits¹.

The relief is worth up to £40,000 a year, because you can invest up to £200,000 each tax year and claim relief on the whole amount³. But the tax breaks come with strings and with real risk. You must hold new shares for five years or the relief can be claimed back¹, VCTs generally have higher running costs than other investment trusts¹, and you can lose all the money you put in⁵. VCTs are generally more suitable for experienced investors¹.

What a venture capital trust is and what it invests in

VCTs invest in small UK companies which are not usually quoted on the stock market¹. They are publicly listed investment trusts, run by a specialist fund manager, listed on the London Stock Exchange². The companies they back are typically young and innovative: unlisted private companies, or companies traded on AIM, London's junior stock market, or the AQSE Growth Market². VCTs started life in 1995¹¹.

The businesses a VCT buys need a lot of capital, usually between £100,000 and £2 million, more than most single private investors could put up themselves¹. Each VCT will typically hold 20 to 70 of these companies, depending on its strategy and how long it has been running⁴. That spread matters: one small company failing is normal and expected, which is why the trust holds a portfolio rather than a handful of positions.

The rules shape what the trust can buy. At least 80% of a VCT's investments must be in qualifying investments, meaning small companies with assets of no more than £30 million before they issue shares and £35 million immediately after¹. The companies must have a place of business in the UK, typically have fewer than 250 employees, and in most cases must be less than seven years old when the VCT first invests in them¹⁰. Certain activities are excluded, for example banking, dealing in land or energy generation¹⁰. The remainder of the VCT's money, up to 20%, is usually kept in cash but can be invested in other investments¹. A VCT must invest in these companies within three years of raising new money¹.

VCTs are one of the four tax-based venture capital schemes, according to HMRC's official statistics¹². If you are new to this kind of structure, the guide to investment trusts explains how listed trusts work, and how dividends work covers the income side.

Income tax relief: 20% on up to £200,000 a year

Buy newly issued VCT shares and you can claim 20% of the amount invested back as income tax relief, on investments of up to £200,000 per tax year¹. That means the relief is worth up to £40,000 a year³. If you invest £10,000, you could reduce your income tax bill by up to £2,000¹⁰.

Three conditions govern whether the relief actually lands in your pocket:

• You must pay UK income tax in the same tax year you invest¹⁰, and the reliefs only apply to people aged 18 or over who are UK income tax payers¹.
• The amount you claim cannot exceed the income tax you are due to pay³, and you can't reclaim more tax than you're liable for².
• You must hold the shares for at least five years, or the relief may have to be repaid¹.

You claim the relief from HMRC, not automatically. You can claim up to four years after the end of the tax year in which you made the investment⁹. On an online self-assessment return, you answer "Yes" to the question on other tax reliefs and, under "Other tax reliefs and deductions", provide the total of your VCT subscriptions and details of the investments. On a paper return, you enter the amount in the part marked "Subscriptions for Venture Capital Trust shares" on the Additional information sheet (SA101). If you do not normally complete a tax return, you can ask HMRC to adjust your tax code if you pay tax through PAYE, or ask for a refund, and you may need to send a copy of your P60 and your VCT tax certificate⁹. The relief reduces the tax you have to pay; if you have already paid too much, it could be paid by cheque or direct to a bank account⁹.

How the relief rate has changed since 1995

The 20% rate is not the first figure the scheme has used. Bestinvest's history of the relief shows the rate and the holding period have moved several times since VCTs launched in 1995⁴:

The most recent cut was announced at Budget 2025: the government is reducing the VCT income tax relief from 30% to 20% for shares issued from 6 April 2026⁶. The same measure increases the investment and gross asset limits in the EIS and VCT schemes¹³. The government estimates the change will impact around 24,000 individuals, who will receive less income tax relief on their VCT investments¹⁴. Some provider pages still describe the old 30% rate, so check the date on any figure you see: shares issued before 6 April 2026 keep the previous treatment, and only new issues from that date get 20%⁶.

Tax-free dividends and gains, but no relief on second-hand shares

The income tax relief is only half the tax story. Dividends paid by a VCT are tax-free, and there is no capital gains tax on profits when you sell VCT shares¹. You don't need to declare VCT dividends or capital gains on your tax return⁹. HMRC publishes a helpsheet, HS298, which explains the capital gains aspects of the VCT scheme and helps with the capital gains pages of a tax return where they are needed¹⁵.

The catch is that the initial relief only applies to new shares. If you buy shares on the secondary market, in other words someone else owned them before you, you can't get tax relief on your initial investment, but the tax-free income and capital gains are still available¹. VCTs are structured as investment trusts, so they can be bought and sold on the secondary market, but any such purchases don't offer the same tax benefits². Only investments made in new issues of VCTs qualify for the tax relief, not shares bought on the London Stock Exchange³. The dedicated page on tax relief on second-hand VCT shares covers that route in detail.

It is worth being clear about what this package is worth compared with other tax wrappers. Returns on investments held in stocks and shares Isas are also free of income tax, dividend tax and capital gains tax¹⁶, without the five-year lock-in or the small-company risk. VCTs are most often used by experienced, adventurous investors, especially those with large tax bills who have perhaps used up their pension and ISA allowances¹⁷. The page on where investments can be held compares the wrappers side by side.

The five-year holding rule and when relief is clawed back

New VCT shares bought directly from the manager are only eligible for the full set of tax reliefs if they are held for five years¹. Sell within that window and you may have to repay any income tax relief you originally claimed¹⁰. The rule is what makes a VCT a long-term commitment: as you must remain invested for at least five years to keep the tax credit, VCT shares are long-term investments⁵.

The clawback is not the only thing that can go wrong with the relief. If the VCT itself doesn't comply with a range of conditions, both the VCT and the investors lose all the tax benefits¹. That risk sits with the trust's management, not with you, and it is a reason to read the prospectus before subscribing rather than treating the relief as guaranteed.

Death within the five years is treated differently from selling. If you die within five years of buying, and your spouse inherits the VCT, the income tax relief wouldn't be repayable in that scenario, and the transfer to a spouse is an exempt transfer for inheritance tax¹⁸. VCTs are exempt from capital gains tax on disposals during your lifetime or on death, and any deferred capital gains are extinguished, so the inheritor takes the trust at its value on the date of death¹⁸. VCT shares otherwise form part of your estate, so they're potentially liable to inheritance tax².

Charges: higher running costs and performance fees

VCTs generally have higher running costs than other investment trusts, and most VCTs charge performance fees as well¹. This is partly the nature of the asset class: investment trusts that invest in more specialist assets, such as private equity, are likely to have higher charges than those investing in conventional assets such as shares or bonds¹⁹. As most investment trusts are actively managed, they tend to have higher charges than tracker and index funds²⁰.

For context, most annual management charges on investment trusts fall somewhere between 0.5% and 1.5%²¹, and one independent survey puts the range at 0.8% to 1.8% in most investment trusts²². A VCT's total costs will typically sit above those ranges once its performance fee is counted. A performance fee is charged on top of the management charge when the trust meets its targets: one VCT's factsheet, for Fuel Ventures VCT, shows a performance fee of 20%²³.

Costs reach you in two ways. The costs of running the trust, such as fund manager fees and accounting costs, are reflected in the performance figures, so a drag on returns shows up in the share price rather than as a separate bill¹⁹. Costs paid by you, external to the trust, such as dealing fees for buying and selling the shares, are not included in those figures¹⁹. Investment platforms may charge each time you buy and sell a share, investment trust or exchange-traded fund²⁴, and investment trusts are treated by platforms in a similar way to shares, so you likely pay one-off fees to buy and sell even if fund trading is free²⁵. The guides to platform fees and charges and dealing charges cover these costs in full.

How to buy VCT shares in a new offer

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 fundraising². New VCT shares are subscribed for on the basis of the relevant prospectus, and the risk warnings contained in that prospectus set out what can go wrong with that particular offer⁵. The prospectus is the document that spells out what the trust will invest in, its charges and its risks, and it is the one place where the terms of that particular offer are set out in full.

Offers run on the VCT's own timetable. Shares are allocated in tranches by the VCT manager during the offer period, and applications can close early and at short notice, especially if there is strong demand²³. Most offers are timed to finish before the end of the tax year in April, because the relief is tied to the tax year in which you invest¹.

After the shares are allotted, the VCT sends you a tax certificate, which you use when claiming relief from HMRC⁹. The claim itself follows the process described above: through self-assessment, or through a tax code adjustment if you pay tax through PAYE⁹.

Selling VCT shares is harder than buying them

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" facility¹. VCTs are listed on the London Stock Exchange, but there is little trading on the secondary market⁵. That thin market is the practical difference between a VCT and an ordinary listed share: the buyer is not always there when you want out.

There are two main routes to sell. The first is a buy-back, where the VCT itself buys shares back from existing investors, typically at a small discount to net asset value. Buy-backs are not guaranteed and may be scaled back if demand is high¹⁰. Most VCTs with control mechanisms aim to keep discounts at no more than 5% to net asset value⁵. The second route is the open market: rather than dealing for yourself online, when it comes to selling VCT shares it is important to go through a stockbroking firm, which will contact a market maker on your behalf and arrange for the shares to be purchased through a buyback⁵.

Two warnings follow from this. First, if you trade VCT shares electronically you may end up receiving a price at a large discount to the net asset value⁵. Second, selling within five years of buying new shares may mean repaying the income tax relief you claimed¹⁰. The page on buying and selling shares explains how normal share dealing works, against which this market's limitations stand out.

Why VCTs are high risk

VCTs are higher risk than most other investment trusts because of the companies they invest in¹. They invest in small companies that are more likely to fail⁵, small, early-stage, unlisted companies⁸, often with unproven business models². You can lose all the money you put into them, and the value of VCTs, and any dividends derived from them, can fall to zero⁵. Which? puts it plainly: VCTs are typically very high-risk investments, where losses could eclipse tax savings¹⁸.

Several features compound the company risk:

• Illiquidity. VCTs can be highly illiquid. Small or young companies can be harder to sell, or be unable to realise their shares at levels close to that which reflect the value of the underlying assets⁵.
• Infrequent valuations. VCTs often only value their portfolio every three or six months¹, and the net asset value is provided by the VCT's board of directors, usually twice a year³. Valuations follow established professional guidelines, such as the British Private Equity and Venture Capital Association's Valuation Guidelines¹, so the published figure is an estimate, not a market price.
• Long time horizons. It may take 7 to 10 years for the companies to become successful and be sold by the VCT⁵.
• Scheme risk. If the VCT itself doesn't comply with the scheme's conditions, both the VCT and the investors lose all the tax benefits¹.

Because of this profile, VCTs are aimed at wealthier, sophisticated investors who can afford to take a long-term view and accept falls in the value of their investment²⁶, and they are only really a consideration for larger portfolios⁸. They are classified as complex financial instruments², and the FCA's rules on high-risk investments, covered in our high-risk investment rules guide, restrict how they can be promoted. If you are considering one, the guide to investment risk and your attitude to risk is the place to start.

VCTs or EIS: how the two schemes differ

The Enterprise Investment Scheme (EIS) is the closest cousin to a VCT. Both are government schemes that reward investment in small, young UK companies with income tax relief, and both carry the same underlying risk. The government has continued the availability of income and capital gains tax reliefs for investors in qualifying companies and VCTs²⁷, and from 6 April 2026 a single measure increases the investment and gross asset limits in both schemes¹³.

The differences are in how you invest and what you get:

Two structural differences matter most to a consumer. First, a VCT spreads your money across a portfolio chosen by a manager, while an EIS investment concentrates it in one company, so a single failure hits harder. Second, EIS shares must generally be held for at least 3 years rather than 5⁹, and EIS offers loss relief that VCTs do not: if you sell EIS shares at a loss, you can set the loss, less any income tax relief already given, against your income for the year of sale or the year before⁹. EIS businesses tend to be slightly more mature than the companies VCTs back at their earliest stage²⁸. The full comparison is in our guide to EIS and SEIS.

Where the tax protection stops

The tax reliefs are conditional, and each condition is a place where the protection can end. The relief is clawed back if you sell within five years¹⁰. It is lost entirely, along with the other benefits, if the VCT fails the scheme's conditions¹. It never exceeds the income tax you actually owe². And it does not protect the investment itself: the value can fall to zero with the relief already spent⁵.

Two further points are easy to miss. Their tax treatment depends on individual circumstances and may be subject to change in the future⁵, as the rate history above shows: the relief has been 20%, 40% and 30% at various times and is back to 20%⁴. And VCT shares are not covered by the FSCS in the way a bank deposit is: this is an investment whose value can fall, not a protected savings product. The pages on how investments are taxed and what happens if a platform fails set out where protection does and does not reach.