Venture capital trusts (VCTs) raised £918m in the tax year just gone, marking a 3% increase on the previous year and the third highest annual fundraise on record. 

VCTs, which hold early-stage UK businesses, offer investors upfront income tax relief under government-approved schemes to offset some of the associated risk. 

However, this relief was cut from 30% to 20% in the Autumn Budget alongside an increase in the maximum size of companies the trusts can invest in. 

Last year’s record fundraising figures likely reflect a rush by investors to lock in the higher rate before the change takes effect. 

The industry has accused the government of giving with one hand and taking with the other, with the Association of Investment Companies (AIC) calling on Chancellor Rachel Reeves to reconsider the move in its response to the Treasury’s call for evidence on the Finance Bill.

The trade body noted the last time upfront tax relief was reduced (from 40% to 30%) fundraising fell by two thirds and did not recover for 16 years.  

Richard Stone, chief executive of the AIC, said: ‘A strong year of fundraising by VCTs is good news for young, ambitious UK companies with growth potential. This is money VCTs can use to help their current investee companies scale up, as well as identifying exciting new opportunities they can help to get off the ground.’

Fundraising this coming year, however, is likely to be a different story, according to Stone.

‘The cut in income tax relief from 30% to 20% shifts the risk/reward calculation for investors and ultimately that will mean growth capital drying up for some of the UK’s most promising companies. We will be monitoring the situation and will continue to urge the government to reconsider its decision.’

Chris Lewis, chair of the VCT Association, noted that the vehicles often provide the first institutional investment to support the founders of the country’s high-potential small and medium-sized enterprises. 

‘With a continued scale-up funding gap in the UK, VCTs play a key role in driving the success of these ambitious companies,’ he said. 

‘While this year’s total market raise of £918m is marginally ahead of last year, the recent reduction in the initial tax relief from 30% to 20% means it is unclear how much of next year’s fundraising has simply been brought forward.

‘We encourage the UK government to reconsider its decision and to adopt a range of other enhancements to ensure the continued strength and growth of VCTs for UK founders and retail investors.’