What you need to know about investing in VCTs as a new season gets underway

As a new fundraising season for venture capital trusts (VCTs) gets underway, here’s more detail on what you need to know about investing in these UK tax-efficient schemes.

VCTs turned 30 years old this year and in their first tax year raised £160m from investors. That amount reached £895m in the 2024/25 tax year, which was the third highest figure on record, according to data from the Association of Investment Companies (AIC).

However, Nicholas Hyett, investment manager at investment platform Wealth Club, said that this tax year “kicked off under the shadow of growing economic uncertainty”.

“Tariff announcements rocked markets early in the tax year, and the UK economy is increasingly coming under pressure from policy own goals, most notably the increase in employers’ national insurance,” he said. “UK startups are not immune to those headwinds.”

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At the same time, Hyett said that “most VCT-qualifying businesses are service-led, highly agile, and focused on the UK market – at least initially.”

“That makes them far less exposed to global trade than larger, multinational firms, while the ability to disrupt existing industries means they have the potential to grow, even if the overall economy is struggling,” he said. “In many ways, their lean, tech-enabled business models and domestic focus means VCT backed companies are well positioned to capitalise on a shifting economic landscape.”

“The rising tax burden in the UK is also likely to make the tax saving features of VCTs increasingly appealing,” Hyett added. “VCT investors not only benefit from 30% income tax relief upfront, but dividends are tax free. With income tax and dividend tax facing potential tax hikes, tax-free dividend potential is not to be sniffed at.”

Here’s more on what you need to know about VCTs.

VCTs are similar to investment trusts, as companies that are listed on the London Stock Exchange (LSE). They are overseen by fund managers and look to raise money from investors who receive shares in the trust, with the aim of investing in assets.

However, the key focus of VCTs is to invest in smaller, earlier-stage companies. These can either be private companies, or ones listed on the UK’s alternative investment market (AIM). Notable companies that have received VCT investment include property website Zoopla, meal kit delivery service Gousto, snack company Graze and clothing marketplace Depop.

VCTs were first announced in the 1994 autumn budget and launched in the 1995 tax year. They were designed with tax-efficient incentives to encourage people to invest in these emerging companies.

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The government confirmed last year that it was extending the VCT scheme for a further 10 years to 5 April 2035.

To qualify for VCT investment, these UK companies typically have to employ fewer than 250 staff and have gross assets of no more than £15m before investment. These companies can normally raise up to £5m in any 12-month period from VCT investment, with a typical overall limit of £12m.

There are three types of VCT. Generalist VCTs invest in a variety of companies in different sectors and at different stages of development. AIM VCTs invest mainly in companies listed, or about to list, on the AIM market. Finally, specialist VCTs focus on a specialist sectors, such as infrastructure or biotechnology, though the fact that they are less diverse can make them higher risk.

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“VCTs are an exciting and dynamic area to invest in, with the potential opportunity to outperform the wider stock market,” said Emma Wall, head of platform investments at Hargreaves Lansdown (HL.L).

Investors buying new shares in a VCT are eligible for 30% income tax relief on their investment, providing they hold onto them for at least five years. That means if someone buys £10,000 of shares, when they file their tax return, they would be eligible to get £3,000 of tax back.

There is also no tax on dividends from VCTs and no capital gains tax on your holding if held for at least five years.

“VCTs are typically used by those investors who may have used their ISA and pension allowances and have larger portfolios, and the appetite for higher-risk investments,” said Wall.

“As the companies VCTs invest in are often new, very small companies which have a higher likelihood of failure, they are higher-risk investments,” she said. “They’re therefore aimed at more experienced investors with a detailed understanding of investments, who can afford to take a long-term view.”

Wall said that Hargreaves Lansdown recommends that VCTs are held as a smaller part — under 10% — of a large (over £100,000) diversified portfolio.

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Investors also need to be prepared to hold onto shares for at least five years, otherwise they will have to repay HMRC any upfront tax relief they have received.

Jason Hollands, managing director at wealth management firm Evelyn Partners, told Yahoo Finance UK that this is an “important consideration because if you suddenly need your money … there’ll be consequences of doing that so it would be unwise to and no one does it unless they’re really desperate.”

VCTs will issue shares at launch, or will periodically issue more new shares, to raise funds. Purchasing new shares allows investors to benefit from the 30% income tax relief.

Wall said that investors should “read the prospectus for any new offer carefully as this will contain the specific risks for that VCT”.

“VCT managers may also from time to time provide buybacks, where they buy shares from existing investors,” she added. “This is often at a small discount to the value of the shares.”

Given that shares are traded on the LSE, they can be bought like normal shares. “But as even the largest VCTs are quite small, they can be illiquid as there are not many buyers and sellers,” said Wall. “This means it’s often difficult to buy and sell shares on the stock exchange and the price to buy and sell may be higher or lower than the value of the underlying investments. It may even be difficult to find a price at all in some cases.”

Investing this way in a secondary market, given the shares have already been owned, is not eligible for that 30% upfront income tax relief but investors will still benefit from tax-free dividends and growth.

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The minimum amount needed to invest varies for different VCTs, though it normally around £5,000, while the maximum is £200,000 per tax year.

VCTs tend to charge higher fees than typical investment trusts and funds. The initial charge can be as much as 5%, while annual management fees can be in the range of 2% to 3%. In addition, a performance fee may also be charged if the VCT performs well.

When it comes to eventually selling VCT shares, Hollands said that it would be unwise to do this by simply “hitting a sell button” online.

“Most VCTs these days are very good at managing their discounts by having regular buybacks so you really want to be selling your shares through a broker who can speak to the market maker and make sure that you’re selling them as part of a regular buyback so that you’re not selling at a big discount,” he explained.

VCTs have a net asset value (NAV), which represents the value of the underlying investments and is provided by the trust’s board of directors, typically twice a year.

“As the investments are not always listed on a stock exchange, this means that the value may be estimated using set valuation methods,” said Wall. “These are, however, estimates and the price you get for selling VCTs could be higher or lower than the net asset value.”

When trying to gauge their performance, one metric to refer to is the NAV total return, which is the NAV plus any dividends that have been paid over a period.

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The VCT’s annual dividend yield is another measure of performance to consider, which comes from dividing the dividends paid each year by the NAV.

“You might think that VCTs are actually all about building up capital gain and seeing the share price rise,” said Hollands. “In fact that’s not the case for … nearly all VCTs… the way they will prioritise generating return for shareholders is actually to pay out tax-free dividends.”

“It’s an important thing to understand because if you look at the share price returns of most VCTs, you’d think that they’re very disappointing – you have to look at the dividend payouts,” he added.

Hollands pointed out that VCTs “tend to be very careful about making sure they only raise money that they think they’ve got a home for and so they come … essentially periodically and will generally do a sort of new fundraising offer.”

He explained that this used to happen towards the end of the tax year but fundraising now starts in earnest around September because more of the main government budgets tend to be delivered in autumn. So VCTs are aiming to raise money ahead of the autumn budget, just in case any changes are announced, he said. As a result, the VCT season now tends to run from September to the end of the tax year.

Another key factor to understand is that VCTs will announce a target amount when they come to fundraising and they might state that the share offer will close at a certain date. Hollands said that the in-demand VCT share offers can fill up quite quickly.

“So it’s really important to be aware of your choices depend on who’s around raising money at the moment and do check as to how full they are before you pop a cheque in the post,” he said. “The good news is, in recent years many more VCTs are now allowing an online process — it all used to be paper based.”

A number of VCTs have launched fundraises in recent weeks. One example is Guinness VCT, which has a portfolio of 21 companies and is seeking to raise up to £10m, with a £5m overallotment facility. The VCT hopes to pay a dividend equal to 5% of NAV from 2026, according to Wealth Club.

Blackfinch Spring VCT also recently launched a £40m fundraise, which included a £20m overallotment facility. The VCT, which is a portfolio of 35 companies, is a generalist investor that prefers to back companies with a focus on research and development or innovation and that are already showing some signs of traction in sales, according to Wealth Club. Over the five years to June 2025, the VCT has delivered a NAV total return of 12.6% and targets an annual dividend equal to 5% of NAV.

Meanwhile, Pembroke VCT recently launched a £60m fundraise, including £20m for overallotment. The VCT, which is a portfolio of around 45 companies, invests across consumer business-to-business services and technology. Over the five years to June 2025, Pembroke VCT has delivered a NAV total return of 46.1% and targets a dividend per share of 5p per annum.

Another example is Puma AIM VCT, which launched a £20m fundraise, £10m of which is an overallotment facility. The VCT mainly invests in companies raising money on AIM and the Aquis Stock Exchange (AQSE), having invested £2.2m in four companies to date. Wealth Club said that the VCT “ultimately hopes to pay a dividend averaging 5p per share per annum, however this is likely some years away”.

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