Venture Capital Trusts: Why higher-rate taxpayers might want to invest in them

For some investors, particularly higher-rate taxpayers, Venture Capital Trusts (VCTs) could offer an attractive and tax-efficient investment prospect. Read on to discover the basics you need to know if you’re thinking about making VCTs part of your financial plan.

VCTs are listed companies that invest in UK businesses. These are typically smaller and younger firms than those you might access through other funds. They could include a range of businesses from technology start-ups to consumer goods companies.

When you invest in a VCT, you become a shareholder in the trust, rather than in individual companies. Your investment would be spread across the VCT’s investment portfolio.

As of 2025, VCTs have been operating for 30 years. According to figures released in November 2024 by the Association of Investment Companies, during that time VCTs have raised £12.5 billion to invest in thousands of small companies. Some of the firms benefiting from VCT investment have become household names. Among the success stories are Zoopla, Unbiased, Virgin Wines, and Secret Escapes.

However, alongside the successes, some companies have failed to deliver a return on investment. Read on to find out why you might consider investing in a VCT and the risks you need to weigh up.

Investing in a VCT could reduce your tax bill

To encourage investors, VCTs offer a tax-efficient way to invest. This could be useful for higher-rate Income Tax payers or those who have used tax allowances, such as their ISA allowance or pension Annual Allowance, for the current tax year.

Here are three types of tax relief you could benefit from when investing in VCTs.

1. Income Tax

In 2025/26, when you invest in VCT shares, you can claim back up to 30% (up to a maximum of £200,000) each tax year to reduce your Income Tax bill when buying new shares directly from a VCT. So, if you invest £20,000, you could receive up to £6,000 in Income Tax relief.

To qualify for this relief, you must hold the shares for at least five years. If you sell the shares within this period, the relief will be withdrawn.

2. Dividend Tax

If the VCT invests in dividend-paying companies, you could boost your income without increasing your tax liability. Unlike other investments, dividends you receive from VCT shares are free from Income Tax and Dividend Tax.

3. Capital Gains Tax

When you sell shares that aren’t held in a tax-efficient wrapper, the gains may be liable for Capital Gains Tax (CGT). However, you can sell your VCT shares without paying CGT on the profit due to “disposal relief”.

VCT investments have the potential to deliver higher returns

Aside from tax incentives, there are other reasons for investing in a VCT.

One attractive feature may be the high-growth potential of the companies VCTs invest in. VCTs aim to invest in companies at an early stage as they prepare to grow and innovate. As such, they have the potential to deliver higher returns than other investments, although this comes with increased risk.

VCTs also offer a way to invest in unlisted companies, which could improve the diversity of your overall investment portfolio.

Some investors may also be drawn to VCTs as a way to support small companies and the wider economy.

The drawbacks of investing in a VCT

The key drawback of VCTs is that you’ll be taking more investment risk than you would if you invested in established companies. Smaller businesses have a higher rate of failure, and that could mean you don’t get back the money you invested.

As a result, VCTs aren’t the right investment option for everyone, and it’s important to balance the potential gains with the risk. Your financial planner can work with you to determine whether VCTs are appropriate for you.

In addition, there isn’t an active market for VCT shares, which can make them difficult to sell.

Speak to us about Venture Capital Trusts

If you’d like to explore whether VCTs could be right for you or have any questions about how they work, please contact us.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

Venture Capital Trusts invest in assets that are high risk, and you may lose all of the money you invest.