AIC calls for immediate reinstatement of 30% VCT income tax relief
Danger of “collapse in scale-up funding” if government does not reverse decision.
The Association of Investment Companies (AIC) has called on the government to immediately reinstate the 30% upfront income tax relief on venture capital trusts (VCTs) in the Finance Bill in its response to HM Treasury’s call for evidence.
The government plans to reduce the relief from 30% to 20% from 6 April alongside an increase in the maximum amount VCTs can invest in a business.
The last time upfront tax relief was cut, from 40% to 30%, fundraising fell by two thirds and did not recover for 16 years.
Richard Stone, Chief Executive of the Association of Investment Companies (AIC)
Richard Stone, Chief Executive of the Association of Investment Companies (AIC), said: “It’s a classic case of giving with one hand and taking with the other. The benefits of higher VCT investment limits will be lost if investors aren’t willing to commit their savings to VCTs. All the evidence suggests that the upfront tax relief is a crucial incentive and cutting it will lead to a collapse in scale-up funding for Britain’s high growth businesses. The last time upfront tax relief was cut, from 40% to 30%, fundraising fell by two thirds and did not recover for 16 years.
“Higher VCT investment limits will help support British companies for longer, enabling them to raise larger sums further along their growth journey. This will lead to more companies remaining in the UK for longer, driving growth and ultimately IPOs on the London market – exactly what the government wants to achieve. Yet this is likely to be undone by the cut to upfront tax relief. The government needs to act now to prevent ambitious British companies losing out.”
EIS scheme serves a different purpose
The government has said that the cut to upfront income tax relief on VCTs was imposed to “balance” the tax incentives with those offered by the Enterprise Investment Scheme (EIS). But this ignores research published by HMRC in 2022, which concluded that the VCT tax reliefs were proportionate and that cutting the rate of income tax relief would have a significant, negative impact on VCT fundraising.
The AIC believes that most VCT investors are unlikely to become EIS investors. EIS investors tend to be more sophisticated and often invest in businesses founded by friends or family, or companies with which they have a personal connection. VCT investors do not have this knowledge or experience.
The Treasury has warned that the UK risks becoming an “incubator” economy, where ambitious businesses are founded, then move overseas in order to grow. The EIS does not address this problem, because it is not as well suited to supporting SMEs through the scale-up phase. VCTs, on the other hand, typically make larger investments, including follow-on investments, which are critical in helping SMEs gain scale once they are established.
VCTs make larger investments than EIS
Source: HMRC/AIC. Investments made during 2023/24 tax year, by size of transaction.
Why upfront income tax relief is necessary for VCTs
Upfront income tax relief is essential to mitigate the high risks of VCT investments. The chart below shows how many VCT investee companies end up generating a full or partial loss.
VCT investment is risky
Source VCTA data. Outcomes of VCTs’ underlying investments in businesses. 2025 data to end of Q3.
VCT investors are attracted by the diversified portfolio of companies in VCTs. VCTs have expert managers who actively help companies grow, often placing experienced executives on the investee companies’ boards to provide valuable advice and oversight. This is vital to help investee companies achieve scale and reduce the chances of the company moving overseas.
For case studies and first-hand testimonials from founders about the impact of VCT investment, see the AIC’s report, ‘Giving great companies a flying start’.
The AIC’s submission in response to the Treasury’s call for evidence can be viewed here.
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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 276 members and the industry has total assets of approximately £268 billion.
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