Venture Capital Trusts (VCTs) have been around for nearly 30 years, but recent changes mean they are becoming more relevant for tax planning, especially in the approach to the end of the tax year. For investors who haven’t used VCTs before, now is a useful time to understand what they are, why people use them and what is changing.
What are VCTs?
A VCT is a type of investment that puts money into small, early-stage UK businesses. To encourage investment into these companies, the government offers tax incentives to investors.
At a high level, VCTs currently offer:
- 30% Income Tax relief on the amount invested (up to £200,000 per tax year)
- Tax-free dividends
- Tax-free growth on the VCT shares.
To keep the Income Tax relief, investors must hold the shares for at least five years.
Because tax relief applies only in the tax year you invest, VCTs are often considered as part of end-of-tax-year planning.
The 2026 change – why timing matters
One of the most important changes is that the Income Tax relief is scheduled to reduce from 30% to 20% in April 2026, following the government’s review of venture capital incentives.
For investors considering VCTs, this creates a limited window where the current level of relief is still available. It doesn’t mean everyone should rush into VCTs, but it does mean that taking time to explore them before the reduction could help avoid missing an opportunity.
Why are the rules changing?
For many years, VCT rules were influenced by the EU’s State Aid regime. In simple terms, State Aid rules were designed to make sure governments did not give unfair subsidies to businesses. The UK no longer follows EU rules directly, but it has kept broadly similar principles under its own system: VCT tax incentives should support genuine growth companies, not low-risk or asset-backed investments.
As a result, VCTs today focus more on:
- Earlier-stage businesses with growth potential
- Higher-risk companies that need capital to expand
- Faster deployment of capital into qualifying businesses.
This means VCTs are less like ‘tax-efficient bond substitutes’ than in the past and more like long-term growth investments with tax advantages.
How VCTs fit into tax year-end planning
With pensions, ISAs and other allowances more restricted than they used to be, VCTs remain one of the last major tools for reducing Income Tax at year-end. Clients often consider VCTs when:
- Pension contributions are already maximised
- There is a higher-than-expected tax bill
- Dividend or salary income pushes them into a higher band
- They want a source of tax-free dividends in future.
The fact that VCT offers often fill up well before 5 April means planning earlier in the tax year has become more important.
How Cashflow Modelling helps
Because VCTs carry higher investment risk and require a five-year holding period, they should be considered in the context of a wider financial plan. Cashflow modelling can help answer practical questions such as:
- Is there spare cash available to invest?
- What level of tax relief might be achieved over multiple years?
- Will future income needs be met while funds are tied up?
- How do VCT dividends fit into long-term income planning?
This turns VCT investing from a reactive tax decision into part of a coherent strategy.
In summary
The upcoming reduction in income tax relief from 30% to 20% in April 2026, combined with the annual 5 April deadline and limited fundraising capacity, means the current tax year may offer valuable opportunities for those who could benefit from VCTs. That does not mean VCTs will be right for everyone, but it does mean that now is a sensible time to understand how they work, how they compare with other planning options and how they fit within a long-term financial plan.
VCTs carry a higher level of investment risk as they invest in small, unquoted or AIM-listed companies. The value of an investment and any income from it can fall as well as rise, and investors may lose some or all of their capital. VCT shares can be illiquid and difficult to dispose of. Tax incentives are subject to personal circumstances and may be amended or withdrawn by HMRC.