Should Investors Rush into Venture Capital Trusts Now?

Individuals looking to invest in venture-capital trusts before the tax year concludes might need to act swiftly. Numerous well-regarded funds are showing signs of reaching their subscription limits much earlier than anticipated, driven by recent Budget modifications that will reduce tax relief for VCTs starting from 6 April 2026.

Back in November, Chancellor Rachel Reeves revealed plans to lower the initial income-tax relief on new VCT share purchases from 30% to 20%, effective at the beginning of the 2026-2027 tax year. Despite this upcoming change, VCTs continue to provide substantial advantages, including tax-free dividends and capital gains alongside the upfront relief. Financial advisors note a surge in investor interest as people aim to lock in the current, more generous relief rate before it diminishes.

Alex Davies, CEO of the investment platform Wealth Club, reports a significant uptick in activity: “Over the last three weeks, we’ve recorded £140 million in VCT sales, compared to just £79 million during the equivalent timeframe last year.” This pattern echoes historical trends. For instance, in 2006, when a prior chancellor cut the income-tax relief from 40% to 30%, fundraising volumes soared leading up to the deadline and then dropped by 65% in the subsequent tax year.

VCTs deliver compelling tax incentives because the government seeks to encourage funding for small, nascent enterprises that frequently face challenges in securing capital. These funds assemble diversified portfolios of such companies to spread risk, while the tax benefits offer investors further safeguards. A recent poll of VCT participants indicated that 42% intend to halt new investments once the tax relief decreases in April.

The drive to commit funds to this year’s fresh offerings could intensify further in the weeks ahead, as only newly issued VCT shares are eligible for the upfront income-tax relief. Importantly, VCT managers impose strict limits on the amounts they will raise. Regulations require these trusts to allocate at least 80% of their funds to qualifying firms within three years, prompting managers to calibrate fundraising carefully to match the availability of high-quality investment prospects.

A number of funds have already introduced “overallotment” provisions, permitting them to collect slightly more capital than originally planned. However, they must exercise caution to avoid excessive fundraising, which could compel them to pursue suboptimal investments merely to satisfy VCT compliance requirements.

The Budget decision has drawn sharp rebukes from industry participants. James Livingston, a partner at Foresight Group, cautions: “This will spark a frenzy for this year’s VCT opportunities as investors chase the existing tax benefits, but over the long haul, it will likely result in diminished funding for pioneering UK enterprises.”

Venture-capital trust portfolios are maturing

On a brighter note, the Budget incorporated several favorable tweaks to the VCT framework. The chancellor increased the permissible investment per company from £10 million to £20 million, and up to £40 million for “knowledge-intensive” firms. Additionally, she doubled the maximum eligible company size from £15 million to £30 million. Rupert West, fund manager of Puma VCT 13, explains: “These adjustments allow VCTs to participate in bigger, more advanced funding rounds, broadening the pool of investable options and enhancing their quality. This positions us as stronger allies to top-tier scale-ups, enabling prolonged support for successful ventures and delivering investors access to more established, diversified holdings over time.”

Conceptually, these reforms could empower VCTs to acquire larger positions in portfolio companies that have demonstrated viability and commercial promise. Such shifts ought to temper the overall risk in VCT portfolios and foster improved sustained returns for shareholders.

Nevertheless, VCT managers foresee that the adverse attention surrounding the tax-relief cut will overshadow the gains from these constructive updates. Andrew Wolfson, CEO of Pembroke Investment Managers, observes: “There’s a substantial danger of waning capital flows into the VCT market. These vehicles are extremely responsive to shifts in investor incentives.”

Among the most anticipated launches is the Gresham House VCTs offering, targeting up to £95 million. This fundraising, which commenced this week, was advanced from earlier projections, as Gresham House had not planned a 2025-2026 raise. Formerly known as the Mobeus VCTs, these funds have enjoyed strong demand in prior years.

Beyond timing their entries wisely, investors must select funds judiciously. With exceptionally large fundraising totals this year, a substantial capital pool will compete for a finite set of deals. It is thus prudent to prioritize VCTs with proven expertise in identifying and accessing premier underlying businesses.

Historically, VCTs have spotlighted remarkable enterprises. Notable successes backed by VCT funding include the property portal Zoopla, meal-kit provider Gousto, and fashion resale platform Depop. Yet, the inherent volatility of early-stage investments has inevitably led to numerous disappointments.

Overall, the long-term performance of VCTs remains underwhelming. According to data from the Association of Investment Companies, the typical VCT has generated a 49% total return over the past decade, factoring in capital appreciation and reinvested dividends. In contrast, the average investment company has achieved 206% over the same span. This underscores the need for caution—investors should not pursue VCTs solely for tax advantages but with a clear-eyed assessment of the risks and opportunities involved.