Advisers and wealth managers say budget cut to VCT tax relief from 30% to 20% will hit fundraising
Three quarters of advisers signal lower appetite for VCTs following tax relief reductions.
The cut to income tax relief on venture capital trusts (VCTs), which invest in some of the UK’s fastest growing companies, has been described as a “retrograde move” and a “significant disincentive to invest in UK startups” by financial advisers and wealth managers.
A straw poll of 24 advisers by Calculus Capital found that 75% expect their future use of VCTs to be reduced as a result of the cut to income tax relief, with 40% anticipating a significant drop.
It’s hard to square the Chancellor’s decision to cut VCT tax relief from 30% to 20% with the government’s ‘pro-growth’ agenda. VCTs play a crucial role in providing some of the country’s most exciting growth companies with money to scale up.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC)
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “It’s hard to square the Chancellor’s decision to cut VCT tax relief from 30% to 20% with the government’s ‘pro-growth’ agenda. VCTs play a crucial role in providing some of the country’s most exciting growth companies with money to scale up. The upfront tax relief is a vital incentive for investors and their advisers to risk their money and cutting it will have an impact on businesses that will struggle to find funding elsewhere.”
The AIC asked advisers and wealth managers for their thoughts on the decision to cut VCT tax relief, as well as the welcome increases to VCT investment limits also announced in last week’s Budget. Their answers are collated below.
Impact on fundraising
Tom Poynton, Executive Director at Baron & Grant, said: “The 10 percentage point cut in upfront tax relief from 30% to 20% is likely to have a significant negative impact on VCT fundraising. Historical data shows that when relief was reduced from 40% to 30% in 2006, fundraising fell by around 65%. Given investors cite tax relief as their primary motivation for investing in VCTs, the change risks sharply reducing inflows from April 2026. While increased investment limits appear supportive in theory, they are unlikely to compensate for reduced investor appetite, thereby constraining entrepreneurial growth and hindering the government’s broader economic ambitions.”
Jason Hollands, Managing Director of Evelyn Partners, said: “I’m afraid that this very retrograde move is going to decimate fundraising. The evidence from past cuts to VCT tax relief clearly points to the huge impact such moves make. The level of incentive on offer for investing in what will remain high risk and illiquid investments, despite some widening of the rules, will simply be insufficient to persuade most investors to subscribe to VCT new issues, especially when they can gain tax relief of up to 45% by subscribing to less risky investments in a pension.
“I also have a secondary concern that it might drive some VCT investors into EIS instead which may not be appropriate for their risk profile, as EIS will continue to provide a 30% tax credit.”
Paul Chilver, Director and Financial Planning Manager of Birkett Long, said: “We will potentially recommend fewer VCT investments next tax year, however, there is more to the story than that. Firstly, many will bring forward their VCT investments from next tax year to this tax year, so they get 30% income tax relief, which will make a higher amount being invested next tax year more unlikely.
“Secondly, as there is a limited amount that can be invested into each company, the top VCT managers can hit capacity quite early on. However, with the changes announced, including a doubling of the investment amount per company to £10 million (£20 million for knowledge intensive companies), this should help increase the capacity available. As a result of this, longer term we envisage more money being invested into VCTs.”
Peter Hicks, VCT Specialist at Chelsea Financial Services, said: “The reduction in tax relief undermines investor incentive to commit hard-earned money for a minimum of five years into some of Britain’s most innovative businesses – a reduction that could, ironically, lead to VCTs taking less risk if managers pivot to even more mature companies to offset the lesser incentive, meaning more early-stage companies miss out on much-needed capital.
“How many incredible businesses will now be starved of growth capital and find their potential unfulfilled? The last time tax relief was reduced, in 2006/07, fundraising nosedived by 65% and it took the industry 16 years to return to the same nominal investment levels. Could the industry now find itself, once again, the victim of a government-induced fundraising drought? All for the sake of a Treasury saving of £125 million by 2027/28 – roughly six hours’ worth of NHS expenditure.”
Ben Yearsley, Investment Consultant at Fairview Investing, said: “The tax cut is a total disaster for VCTs. This move is completely at odds with the supposed growth push by Labour – it is anti-growth and will have a detrimental effect on smaller companies looking for growth capital.”
Impact on UK startups and growth companies
Tom Poynton, Executive Director at Baron & Grant, said: “The cut to upfront VCT tax relief acts as a significant disincentive to invest in UK startups. Tax efficiency has long been central to encouraging investment in early-stage, high-risk businesses that are essential to national growth and job creation. Reducing relief to 20% erodes this incentive, particularly at a time when inflation and capital constraints already challenge fundraising. By diminishing investor confidence and potentially redirecting funds away from the VCT market, the measure risks restricting the very scale-up activity the government seeks to promote. In short, the reform contradicts stated growth objectives and may impede innovation-led economic development across the UK.”
Jason Hollands, Managing Director of Evelyn Partners, said: “The government talks often about wanting to boost growth and investment into domestic companies. I fear this measure will do the opposite. They’ve missed a golden opportunity to rejuvenate VCTs and the capital they could deploy behind British startups. In my view they should have raised the relief available to match the higher rate of income tax. When this happened briefly in the past, fundraising rose tenfold.”
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Notes to editors
- The Association of Investment Companies (AIC) represents a broad range of investment trusts and VCTs, collectively known as investment companies. The AIC’s vision is for closed-ended investment companies to be understood and considered by every investor. The AIC has 286 members and the industry has total assets of approximately £272 billion.
- For more information about the AIC and investment trusts, visit the AIC’s website.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
