What are…Venture Capital Trusts?

For many of us, the words ‘venture capital’ sound like something reserved for Silicon Valley billionaires. But thanks to Venture Capital Trusts (VCTs), ordinary investors can back fast-growing British companies while enjoying generous tax breaks

NMTBP explains what VCTs are, how they work, and whether they’re right for you

What are Venture Capital Trusts?

A Venture Capital Trust (VCT) is a type of publicly listed investment company, introduced by the UK government in 1995 to encourage investment in small, early-stage businesses

VCTs raise money from individual investors
That money is pooled and used to invest in a portfolio of young, often high-risk UK companies
In return, investors get potential growth opportunities plus valuable tax benefits

Think of it as a way for everyday investors to participate in venture capital – but through a stock market-listed fund rather than writing cheques to startups directly

The tax benefits of VCTs

The biggest draw of VCTs isn’t just the potential returns – it’s the tax relief. Here’s what investors can expect:

Income tax relief
- Up to 30% income tax relief on investments of up to £200,000 per tax year
- For example, invest £10,000 into a VCT, and you could reduce your tax bill by £3,000
- You must hold the investment for at least five years to keep this benefit
Tax-free dividends
- Dividends from VCTs are tax-free. Many VCTs aim to pay regular dividends, often around 4–5% annually
Tax-free capital gains
- If your VCT shares increase in value, you won’t pay Capital Gains Tax (CGT) when you sell them

These incentives are designed to balance the higher risk of investing in smaller, less stable companies

The risks of VCTs

Like all investments, VCTs come with risks – and in some cases, those risks are higher than those of traditional funds or ISAs

High risk, high reward: The underlying companies are often early-stage, meaning some may fail completely
Liquidity issues: VCT shares trade on the London Stock Exchange, but demand is limited. Selling before five years can be difficult and usually means losing tax relief
Performance varies: Some VCTs have strong track records, others don’t. Past performance is not a guarantee of future results
Complexity: VCTs are not as straightforward as investing in an index fund or stocks & shares ISA

Who might consider VCTs?

VCTs aren’t for everyone, but they can make sense for certain UK investors:

Higher-rate taxpayers looking to reduce their income tax bill
Experienced investors who already use ISAs and pensions and want to diversify
Income seekers attracted to tax-free dividends
Long-term investors comfortable with holding for at least five years

They’re usually not recommended for beginners or those who need access to their money in the short term

Examples of UK VCTs

Some of the well-known VCT providers in the UK include:

Octopus Titan VCT – One of the largest, backing companies like Zoopla and Depop
British Smaller Companies VCTs – Focused on established, scaling SMEs
Gresham House VCTs – Aim for both growth and regular dividends

Many VCTs raise money only during certain periods (“fundraising offers”), so timing can matter

Venture Capital Trusts offer UK investors a unique opportunity: access to high-growth businesses plus generous tax incentives. But the rewards come with higher risks, and they’re not suitable for everyone

For those who have already maxed out ISAs and pensions, and who are comfortable with higher-risk, long-term investments, VCTs can be a valuable addition to a diversified portfolio

As always, it’s worth seeking independent financial advice before diving in, and caveat emptor!