Impending Tax Relief Cuts Threaten Venture Capital Trust Investments

Recent changes announced in the UK Budget regarding Venture Capital Trusts (VCTs) are expected to significantly impact investor behavior and funding for start-ups. The government plans to reduce income tax relief on VCTs from 30% to 20% starting in April 2026. A survey conducted by Wealth Club, which included responses from 511 high net worth and sophisticated investors, reveals a sharp decline in interest in VCTs as a result of this policy change.

85% will invest less or nothing at all in VCTs next yearChanges to Venture Capital Trusts ‘Could Lead to Funding Drought’

The Wealth Club survey indicates that 41.6% of investors will cease investing in VCTs once the tax relief cuts take effect, while 43.5% plan to reduce their investments. Furthermore, a staggering 96.4% of respondents expressed a desire for the government to reconsider the reduction in tax relief. The survey also highlighted that 85.6% of participants believe overall investment in start-ups and scale-ups will decline due to these changes. Only 13% of VCT investors anticipate increasing their investments in other venture capital schemes, such as the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS).

Changes to Venture Capital Trusts ‘Could Lead to Funding Drought’

Alex Davies, CEO and Founder of Wealth Club, emphasized the critical role VCTs play in funding UK start-ups, stating that the anticipated funding drought could have severe consequences for small businesses that rely on this financial support. Historical data supports this concern; when VCT relief was previously cut by 10%, fundraising plummeted by 65% year-on-year. The last time VCT income tax relief was set at 20% in the 2003/04 fiscal year, the industry raised only £70 million, a stark contrast to the nearly £900 million raised in 2024/25.

85% will invest less or nothing at all in VCTs next year

VCTs are attractive to investors primarily due to their tax benefits, which include up to 30% income tax relief, tax-free dividends, and exemption from capital gains tax. They provide a unique opportunity for investors to access high-growth smaller companies, which often outperform larger, publicly listed firms. However, VCTs are also characterized by higher risk and require a minimum investment of £3,000 or more, making them suitable primarily for wealthier or more sophisticated investors.

85% will invest less or nothing at all in VCTs next yearChanges to Venture Capital Trusts ‘Could Lead to Funding Drought’

Critics of the government's decision argue that the reduction in tax relief undermines the support for innovation and job creation in the UK. The anticipated decrease in VCT investment could hinder the growth of emerging businesses, which are vital for economic development. Many investors are concerned that the government's actions contradict its stated commitment to fostering economic growth.

85% will invest less or nothing at all in VCTs next year

• “VCTs have been a crucial source of funding for the UK’s small and growing companies over the last 30 years. However, UK start-ups should prepare for a funding drought after the government’s decision to water down income tax relief. Two fifths of Wealth Club clients expect to invest less in VCTs under the new rules, another two fifths say they won’t invest anything at all. That should not be a surprise. The last time VCT relief was cut by 10% fund raising fell by 65% year-on-year. The last time VCT income tax relief was set at 20%, way back in 2003/04, the industry raised just £70 million. That compares with nearly £900 million raised in 2024/25. We are seeing a rush of investors looking to get in before the tax rules change, which is likely to drive a race to access the best VCTs before they fill up. However, we expect VCT investment to fall off dramatically next tax year. That is bad news for the hundreds of small UK companies that rely on VCTs for funding and is frankly unforgivable for a government that claims to be all about economic growth.” — Alex Davies, CEO and Founder of Wealth Club

85% will invest less or nothing at all in VCTs next year

• “The last time VCT relief was cut by 10% fund raising fell by 65% year-on-year.” — Alex Davies, CEO and Founder of Wealth Club

85% will invest less or nothing at all in VCTs next year

The planned reduction in VCT tax relief poses a significant threat to the funding landscape for UK start-ups. With a substantial portion of investors indicating they will withdraw or reduce their investments, the government faces pressure to reconsider its decision to ensure continued support for innovation and economic growth in the country.

85% will invest less or nothing at all in VCTs next year