Should Investors Join the Rush for Venture-Capital Trusts?
•February 8, 2026
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Companies Mentioned
Why It Matters
The relief cut reshapes investor incentives, potentially throttling capital flow to innovative UK businesses that rely on VCT funding.
Key Takeaways
- •Income‑tax relief drops from 30% to 20% in 2026
- •VCT sales surged £140m vs £79m last year
- •Funds risk over‑raising, may invest lower‑quality deals
- •Investment caps doubled, expanding target company size
- •Average VCT return 49% over ten years
Pulse Analysis
The 2024 Budget’s reduction of VCT tax relief has ignited a classic front‑running dynamic among investors seeking to lock in the current 30% income‑tax deduction. Historical patterns show that such policy shifts trigger a burst of fundraising activity followed by a sharp decline once the new regime takes effect. This year’s £140 million inflow in just three weeks underscores the urgency, as high‑net‑worth individuals and advisers scramble to capture the remaining premium benefit before the 2026 cut‑off.
For VCT managers, the relief downgrade is a double‑edged sword. On one hand, the chancellor’s decision to double the maximum investment per portfolio company—from £10 million to £20 million, and up to £40 million for knowledge‑intensive firms—expands the addressable market and could improve portfolio quality by targeting later‑stage, lower‑risk ventures. On the other hand, caps on total fundraising force managers to balance demand with a finite pipeline of viable deals. Over‑allocation risks diluting returns, as funds may be compelled to back less attractive opportunities merely to meet the 80% investment rule within three years.
The broader implication for the UK innovation ecosystem is nuanced. While the immediate rush injects short‑term capital into early‑stage companies, the anticipated drop in VCT inflows after 2026 could tighten financing for startups that traditionally depend on these tax‑advantaged vehicles. Moreover, the sector’s ten‑year average return of 49%—well below the 206% benchmark for broader investment companies—highlights the need for investors to evaluate VCTs on performance, not just tax efficiency. Savvy investors should therefore prioritize funds with proven deal‑sourcing capabilities and robust track records to mitigate the heightened risk environment.
Should investors join the rush for venture-capital trusts?
VCT investors must act fast before tax relief cuts
Investors hoping to put money into venture‑capital trusts (VCTs) before the end of the tax year may need to move quickly. Several popular funds appear to be at risk of selling out well before then, following changes announced in the Budget that will cut tax relief on VCTs from 6 April 2026 onwards.
In November, Chancellor Rachel Reeves announced that the up‑front income‑tax relief available on investments in new VCT shares will fall from 30 % to 20 % from the start of the 2026‑2027 tax year. Venture‑capital trusts will remain generous, offering tax‑free income and capital gains as well as the up‑front relief, but advisers say investors are rushing to secure the higher rate while it’s still on offer.
“We’ve seen £140 m of VCT sales over the past three weeks compared to £79 million in the same period last year,” confirms Alex Davies, CEO of investment platform Wealth Club. There’s a precedent for this. In 2006, when a previous chancellor reduced income‑tax relief from 40 % to 30 %, sales spiked in the run‑up to the change and then slumped 65 % in the following tax year.
VCTs offer tax benefits because the government is keen to incentivise investment in small, early‑stage businesses that often struggle to raise capital. The funds build portfolios of such firms to diversify risk, but investors get additional protection via the tax breaks. One recent survey of VCT investors found that 42 % planned to stop putting money into these funds once the tax relief falls in April.
The rush to invest in this year’s new issues may accelerate in the coming weeks, with only new VCT shares qualifying for up‑front income‑tax relief. Critically, VCT managers set caps on fundraising. Venture‑capital trusts must invest 80 % of their assets in qualifying companies within three years, so managers try to avoid finding themselves with more money to invest than their likely flow of good‑quality deals can justify.
Several funds have already announced “overallotment” allocations, where they raise a little more than initially expected. But funds must be careful not to over‑raise, for fear of being forced to invest in less attractive opportunities simply to comply with the VCT rules.
The Budget announcement has prompted criticism from the VCT sector. James Livingston, a partner at Foresight Group, warns: “It means a rush for this year’s VCT investment, as investors look to maximise current tax relief, but the longer‑term effect is likely to be less capital available for innovative UK businesses.”
That said, the Budget also included more welcome adjustments to the VCT regime. The chancellor raised the amount of money that VCTs are allowed to invest in individual companies from £10 million to £20 million – and up to £40 million in “knowledge‑intensive” companies. She also doubled the maximum size of companies eligible for VCT investment, from £15 million to £30 million.
“By allowing VCTs to back larger, later‑stage rounds, the investible universe expands and the quality of opportunities improves,” says Rupert West, fund manager of Puma VCT 13. “We can be a more valuable partner to the most attractive scale‑ups and support our winners for longer, so investors get exposure to a more mature, better diversified portfolio over time.”
Venture‑capital trust portfolios are maturing
In theory at least, the changes may enable VCTs to take larger stakes in portfolio companies that have done more to prove they are viable and potentially commercially successful. That should reduce the risk profile of VCT portfolios and underpin stronger long‑term investment performance.
Still, VCT managers anticipate the negative publicity around the tax‑relief reduction will outweigh any boost enjoyed from the more positive changes. “There is a very real risk of reduced cash inflows into the VCT sector,” says Andrew Wolfson, CEO of Pembroke Investment Managers. “VCTs are highly sensitive to investor incentives.”
One closely watched new issue will be the Gresham House VCTs, which are seeking to raise up to £95 million. The offer, which opened this week, has been brought forward, with Gresham House previously indicating it would not conduct a fundraising in 2025‑2026. Previously operating as the Mobeus VCTs, the funds have proved popular in previous years.
In addition to investing in a timely fashion, investors will need to choose their funds with care. One result of funds raising such large sums this year will be a big pool of capital chasing a limited number of investment opportunities. It therefore makes sense to favour VCTs with a strong record of securing exposure to the best underlying businesses.
VCTs have identified some impressive businesses in the past. High‑profile ventures built with the support of VCTs’ capital include property website Zoopla, food‑delivery service Gousto and the clothing marketplace Depop. However, the nature of investing in small businesses means there have also been multiple failures.
In fact, the long‑term record of VCTs isn’t particularly impressive. Data from the Association of Investment Companies reveals that the average fund has delivered a return of 49 % over the past ten years, comprising capital growth and dividends reinvested. The average investment company has returned 206 % over the same period. It’s a reminder to tread carefully – and not to invest in VCTs simply to get a tax break.
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