VCTs have long been a popular investment vehicle for those seeking higher-risk opportunities, offering substantial tax breaks to investors. But as the government seeks to adjust its approach to venture capital funding, the move to scale back these incentives has raised questions about the future of the scheme and its potential impact on the UK’s burgeoning start-up ecosystem.
The Role of VCTs in UK Start-up Funding
Venture Capital Trusts were introduced in 1995 as part of a government initiative to stimulate investment in small UK businesses. These trusts pool funds from private investors, directing capital into emerging or high-growth companies that might otherwise struggle to access funding from traditional financial institutions. VCTs are particularly attractive to investors due to the tax incentives they offer, including upfront income tax relief.
According to the UK government’s Autumn Budget 2025, the tax relief on VCT investments will drop from 30% to 20% from April 2026. This reduction is part of a broader adjustment to the UK’s tax policies surrounding venture capital funding. The goal is to bring more balance between VCTs and the Enterprise Investment Scheme (EIS), which does not offer similar dividend reliefs but remains a key player in early-stage business funding. While this restructuring is intended to streamline the benefits between the two schemes, it is also raising concerns about the viability of VCTs for investors.
Industry leaders, such as Wealth Club CEO Alex Davies, have warned that the reduction in tax relief could significantly diminish the attractiveness of VCT investments. In 2006, when the relief was reduced from 40% to 30%, VCT fundraising dropped by a staggering 65% year-on-year. Davies predicts a similar decline after the new changes take effect in 2026, with smaller businesses, in particular, facing challenges in securing the capital needed to grow and scale.
What This Means for Investors and Start-ups
While the reduction in tax relief is seen as a move to better balance the incentives across different funding schemes, its immediate impact is likely to be felt more acutely by investors. A drop in income tax relief could lead to a decline in the volume of capital raised through VCTs, making it harder for high-growth UK companies to secure the funding they need.
However, some experts believe that this reduction could lead to a short-term spike in VCT investments. With investors looking to take advantage of the higher relief rates before they are cut, VCT funds are likely to experience an influx of capital in the months leading up to the April 2026 deadline. This could provide a temporary boost to smaller businesses seeking funding, but the longer-term effect remains uncertain.
The proposed changes are not without their silver linings. In the same budget, Chancellor Rachel Reeves announced plans to increase the investment limits for both VCTs and the EIS, allowing these schemes to support more mature businesses and those seeking to scale.
The Future of UK Start-ups and Investment Incentives
As the government looks to reform its venture capital schemes, it is clear that balancing the needs of investors with those of start-up businesses is a delicate task. Reducing upfront tax relief may dissuade some investors, but the wider changes to investment limits and eligibility criteria could offer more substantial long-term benefits for growing businesses.
Start-ups and investors alike will be watching closely as these changes take shape, as the success of the VCT and EIS schemes will play a pivotal role in shaping the future of UK entrepreneurship. While the immediate future of VCTs may look uncertain, the broader overhaul of the UK’s tax incentives for early-stage companies is a sign of the government’s commitment to fostering a dynamic, entrepreneurial ecosystem.
