Still much to celebrate about VCTs

The current spate of pessimistic headlines reflects a change to the tax rules on VCTs announced by Rachel Reeves in December’s Budget. From the 2026-27 tax year onwards, the Chancellor announced, the upfront income tax relief on investments in new VCT shares will fall from 30% to 20%. In other words, investors in VCTs from 6 April onwards will get a third less reward on their income tax bills in return for risking their money.

Not surprisingly, VCT managers are unhappy with this change – the Association of Investment Companies (AIC) has also expressed grave concerns. Several polls of VCT investors and advisers have suggested they will be less likely to invest in the funds once the change takes effect. And there is a historical precedent: in 2006-07, the last time upfront tax relief was reduced, investment in VCTs fell by around two-thirds.

Now, there are plenty of valid reasons to criticise the Chancellor’s decision. Above all, at a time when the UK is desperate for economic growth, it doesn’t make much sense to take measures that could reduce the supply of capital to early-stage companies with ambitious plans to scale up. VCTs are one of the few sources of funding for such companies, so making it harder for them to raise money is likely to be counterproductive.

However, investors shouldn’t take the wrong message from this argument. The VCT industry will continue to operate – we will still see new fundraisings in 2026-27, with managers offering exposure to a range of interesting opportunities. And critically, VCTs will continue to offer generous tax perks to investors who want to explore those opportunities.

Yes, the upfront income tax relief is coming down to 20%. But that still means it will only cost you £160,000 to invest £200,000, the maximum investment in VCTs that qualifies for income tax relief each year. In addition, any profits you make on your VCT investments will continue to be tax free. So too will be all income; this is especially valuable since VCT managers often structure funds to deliver a regular stream of dividends.

It’s also worth pointing out that the risk profile of VCTs is set to change. A less widely covered Budget announcement will give VCTs the option of investing in larger companies – and investing larger sums. That could see the funds build portfolios of more mature businesses that are less likely to fail. In which case, investors may feel more comfortable with the value proposition that VCTs offer.

The Chancellor’s critics will almost certainly be proved right in warning that VCT investment will fall next year. And the investment industry’s efforts to persuade her to change course are entirely understandable – though very unlikely to prompt a last-minute U-turn.

However, if you’re a potential investor in VCTs, don’t make the mistake of thinking this should automatically put you off. For the right investors, these funds will continue to offer an attractive long-term exposure to companies with potentially explosive growth, and you’ll still be getting some very worthwhile tax advantages, even if they’re not quite as fulsome as before.

Invest before the end of the current tax year, of course, and you’ll still be entitled to the full 30% upfront income tax relief, though most managers are now close to shutting up shop for the year, or have already done so. But when managers start to launch new issues in 2026-27, VCTs will still be very much worth a look.