What are Venture Capital Trusts?
Learn what venture capital trusts are (VCT) and how they can fit into an investment strategy.
Key points
VCTs invest in small, early‑stage UK companies and can offer 20% income tax relief and tax-free dividends.
Upfront relief is only for new VCT shares, up to £200,000 per tax year, and you must hold the shares for at least five years to keep it.
VCTs are considered higher risk than traditional investments.
Venture Capital Trusts (VCTs) are publicly listed companies that invest in early‑stage UK businesses, giving investors access to companies that may not be available through mainstream investment routes. They were created by the UK government to help channel funding into smaller, growing firms that often struggle to secure traditional finance.
What is a VCT (Venture Capital Trust)?
Venture Capital Trusts (VCTs) are listed companies that buy into parts of companies at their early development. Footnote [1] These companies are often in their early stages and may struggle to access traditional funding. When you invest through a VCT, you’re indirectly buying shares in a range of these growing businesses.
VCTs were introduced by the UK government to encourage investing in these smaller companies, as they support job creation and economic growth. Footnote [2]
How do VCT investments work?
VCTs are listed companies that pool money from investors and use it to buy shares in VCT‑qualifying businesses. But when you invest in a VCT, you don’t own shares in the underlying companies; you own shares in the VCT itself. Footnote [1]
Each VCT is run by fund managers, who pick the companies to back, and then monitor how they perform. As VCTs are listed on the London Stock Exchange, you can buy and hold their shares the same way you would any other public company. Footnote [1]
Qualifying rules and eligibility criteria
To keep their approved status, VCTs must follow HMRC rules, like:
- investing in mainly small early-stage UK companies
- invest at least 80% of its assets in qualifying holdings
- report detailed information on their investments. Footnote [3]
For a company to qualify to be part of a VCT, there are additional rules. Companies must:
- be unquoted or AIM-listed
- carry out a qualifying trade
- have limited assets and employee numbers
- be independent (not controlled by another company)
- use the investment to help grow the business, not to acquire other companies. Footnote [3]
As for eligibility to invest, anyone who pays UK income tax can invest in a VCT and can put in up to £200,000 per tax year into new VCT shares eligible for tax relief. To keep this relief, you must keep the shares for at least five years. Footnote [3]
Tax treatment and VCT tax relief
There are several tax advantages designed to encourage people to invest in VCTs. These benefits can make VCTs attractive for long‑term investors who are comfortable with higher‑risk investments.
Income tax relief on VCT investments
One benefit is that when you buy new VCT shares, you may be able to claim 20% income tax relief on the amount you invest. This applies on investments of up to £200,000 per tax year, as long as you have enough income tax liability to use the relief. Footnote [3]
VCTs can also play a role in tax‑year‑end planning, because income tax relief is only given for the tax year in which you invest. This means some people use VCTs to reduce their income tax bill before the tax year closes.
If you have a VCT and need to claim your tax relief you can do this in two ways:
-
Through your Self-Assessment tax return.
-
By asking HMRC to adjust your PAYE tax code. Footnote [3]
Are VCT dividends taxable?
Any dividends that are paid by VCTs are also tax-free, regardless of your income level.
As these are tax-free you won’t need to declare them on your Self-Assessment tax return.
But it’s worth noting that this only applies as long as the VCT is HMRC-approved. If HMRC withdraws the VCT approval, dividends paid during this period may lose their exempt status and become taxable. Footnote [3]
The treatment of these is very different from standard UK share dividends, as these are subject to dividend tax once you exceed the annual dividend allowance. Depending on your income tax band, you can expect to pay tax at 10.75%, 35.75% or 39.35%. Footnote [3]
VCT benefits and risks
| Benefits | Risks |
|---|---|
| 20% income tax relief on new VCT shares, up to £200,000 per tax year. | Higher risk than mainstream funds because VCTs invest in small companies with higher potential for failure. |
| Tax-free dividends on qualifying VCT shares. | Second-hand VCT shares don't qualify for upfront income tax relief, which can reduce demand in the secondary market. |
| No Capital Gains Tax when selling qualifying VCT shares. | Higher exposure to business failure. |
| Diversification into early-stage UK companies not found in mainstream funds. | Tax benefits don’t reduce investment risk; if HMRC approval is lost, tax exemptions (e.g. on dividends) may be withdrawn. |
| Supports UK business growth. |
How to invest in a VCT
You can invest in VCTs in a few different ways.
Firstly, you might invest during a VCT's offer period, which is where it raises money by issuing new shares. This is essential if you’re wanting to qualify for the Government’s 20% income tax relief. These offers are usually only available at certain points of the year, and you can take part by directly investing through the VCT manager, via an investment platform, or through your financial adviser. Footnote [3]
You can also invest in existing VCTs on the London Stock Exchange, but buying second-hand VCT shares does not provide you access to income tax relief, as this only applies to new shares. The secondary market for VCT shares is also more limited, partly because they don't offer tax relief, so demand is not as strong.
If you’re considering investing in a VCT, making sure you get regulated financial advice is key. A financial adviser will be able to help you understand offer periods, the risks and whether VCTs align with your wider financial goals. Given the higher-risk nature of VCTs and their uniqueness, adviser support can be particularly useful.
If you’re looking for more information on other investments, read our article on types of investments or our guide to investment strategies.
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