VCTs (Venture Capital Trusts)

VCT brochures

Venture Capital Trusts provide private investors with a tax efficient method of investing in small to medium sized unquoted trading companies in the UK. 

By ‘unquoted’ I mean that none of the shares, stocks, debentures or other securities of the companies can be listed on a recognised stock exchange. 

Companies whose shares are dealt in solely on the Alternative Investment Market (AIM) of the London Stock Exchange are unquoted companies. This unquoted market is one that the private investor would normally find it difficult to use.

Venture Capital Trusts (VCTs)

The VCT scheme started on 6 April 1995.  It is designed to encourage individuals to invest indirectly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, by investing through Venture Capital Trusts. 

Shares or securities in a company which ceases to be unquoted can continue to be treated as being comprised in the VCT’s qualifying holdings for the following five years.

Please note at the outset that VCTs are by their nature complex products with features that vary from issue to issue.  The differing structure and investment plans of the trust managers invariably impact on the risk of each trust. 

This is an investment that all but the most experienced investors should only make after taking advice from an independent financial adviser (IFA) with experience in this field.

Private Equity characteristics

The following is quoted from The BVCA Private Equity and Venture Capital Performance Measurement Survey 2018

The characteristics of private equity performance differ from other asset classes. Typically, private equity fund investments show less correlation to quoted public equity markets and are relatively illiquid, particularly in the early years.

Private equity is a long-term investment, which, in the first few years, will normally show a drop in the net asset value before showing any significant uplift. This is often the effect of management fees being paid out, as well as the costs of initial capital being deployed into companies.

The life cycle of a private equity fund commitment is typically ten years or more. An investor will receive pro-rata distributions of capital during the life of the fund.

What is a VCT?

A VCT is a fully quoted public limited company whose purpose is to invest the majority of its shareholders’ funds in unquoted growth companies with a view to making substantial capital profits when those investments are subsequently realised by flotation or trade sale. 


  • By investing in a VCT, you spread the investment risk over a number of companies.


  • To help stimulate investment into smaller unquoted companies the Government granted substantial tax benefits to VCT investors when they were first introduced in the 1995/96 tax year.  Those tax reliefs have been altered from time to time but have remained attractive.


  • Prior to investment in individual companies, funds are usually invested in fixed interest securities and bank deposits.  These investments are sold as and when required to provide the necessary funds for investment in suitable companies.


  • Within three years the VCT manager will seek to invest at least 70% of the funds raised in ‘qualifying companies’.


  • Previously VCTs were companies listed on the London Stock Exchange, but from April 2011 VCTs are companies admitted to trading on a regulated market.  A regulated market is one named as such by the European Union (EU), covering markets in EU and European Economic Area (EEA) countries.


  • VCTs are similar to investment trusts. They are run by fund managers who are usually members of larger investment groups.  Investors can subscribe for, or buy, shares in a VCT, which invests in trading companies, providing them with funds to help them develop and grow.  VCTs realise their investments and make new ones from time to time. The company must have a permanent establishment in the UK and exist for the purpose of carrying on a ‘qualifying trade’ or be the parent company of a trading group whose business as a whole meets the scheme’s rules. Most trades qualify, provided that they are conducted on a commercial basis with a view to making profits.  


The main excluded activities (i.e. where they amount to more than 20 per cent of the trade) are:

  • dealing in land, financial instruments, or in goods other than in an ordinary trade of retail or wholesale distribution
  • financial activities, property development, or providing legal or accountancy services
  • leasing or letting assets on hire, except in the case of certain ship-chartering activities
  • receiving royalties or licence fees, except where these arise from an intangible asset such as a patent or know-how, where most of it has been created by the company (or one of its subsidiaries)
  • farming, market gardening, or forestry
  • operating or managing hotels, guest houses, hostels, or nursing or residential care homes
  • providing services to another company in certain circumstances where the other company’s trade consists to a substantial extent in excluded activities
  • shipbuilding, producing coal or steel
  • generating or exporting electricity which will attract a Feed-in Tariff

The tax benefits

VCTs have quite rightly been referred to as Super ISAs.  Tax reliefs are only available to individuals aged 18 years or over and not to trustees, companies or others who invest in VCTs. 

The main tax benefits of a VCT are:

  • Income tax relief at 30% of the amount subscribed for shares (2020/21).  The shares must be new ordinary shares and must not carry any preferential rights or rights of redemption at any time in the period of five years beginning with their date of issue.  You can get this relief for the tax year in which the VCT shares were issued, provided that you hold the shares for at least five years.
  • The income tax relief at 30% is available to be set against any income tax liability that is due, whether at the basic, higher or additional rate, on investments in new VCT issues up to £200,000 issued to you in a tax year.  A tax year begins on 6 April in one year and ends on the following 5 April.  The investor needs an income tax liability to utilise some, or all, of this relief.
  • For example an investment of £10,000 will attract £3,000 tax relief (giving a net cost of £7,000).  It is important to note that the tax relief in this example would only be given if the investor has an income tax liability of at least £3,000 in that tax year.  If the investor only has a tax liability of, say, £2,400 then that is all the tax relief they will get on their VCT.  They might, therefore, wish to consider investing just £8,000 in a VCT in the current year and the balance in the next tax year to pick up the rest of the tax relief.
  • If you sell or otherwise dispose of your shares within five years of them being issued to you, you will have to repay the income tax relief you received for the shares you dispose of.  This does not apply if the disposal is a transfer between spouses.
  • If there has been a transfer between spouses of shares for which income tax relief was obtained, the recipient is treated in relation to any subsequent disposal or other event as though he or she had subscribed for the shares in the first place.  This means that, for example, if the spouse to whom the shares were transferred disposes of them within five years after they were issued, other than via another transfer between spouses, they will have to repay the income tax relief you received for the shares that your spouse disposes of.
  • Tax Free Capital Growth.  Private investors will not be liable to capital gains tax on any gains arising from the disposal of their VCT shares (whether acquired as new shares or subsequently), provided they were purchased within the £200,000 annual limit.  You should note, however, that any realised loss on the disposal of VCT shares cannot be used to create an allowable loss for capital gains tax purposes.
  • Dividends paid by a VCT are free of income tax in the hands of the investor.  Unlike an ordinary investment trust capital gains may be distributed by way of dividends to investors.  Such dividend relief is available for both newly issued shares and second-hand shares acquired, for example, through the Stock Exchange.
  • A transfer of shares in a VCT between spouses is not deemed to be a disposal and therefore all tax reliefs will be retained.

Conditions for VCT approval

The main conditions a company must satisfy to be approved as a VCT are that:

  • its income for its most recent accounting period must be wholly or mainly from shares or securities
  • at least 70% (by value) of its investments must be ‘qualifying holdings’ of ordinary shares with no preferential rights to dividends, or to the company’s assets on its winding up, and no right to be redeemed.

The issue of risk

Before considering an investment into a VCT there are a number of areas to do with the issue of risk that you need to consider as follows:

  • VCTs are considered to be a high risk investment.  They will, therefore, only be suitable for you if you have an adventurous attitude to risk, or you have a moderate or moderately adventurous attitude to risk but are happy to invest at least part of your capital in a high risk investment.  We will assess your attitude to risk before offering you advice.
  • There are many different types of investment.  Are you clear as to why you wish to invest in a VCT?  It is possible that there is another, lower risk, investment that would also meet your objectives.  As independent financial advisers we are aware of a range of different types of investment and their advantages and disadvantages.
  • Are you comfortable with the fact that VCTs are an illiquid investment?  A VCT has to be held for 5 years to qualify for the associated tax breaks.  However, even after 5 years you are likely to find it difficult to sell your VCT.
  • Some VCT managers promise to buy your shares from you but a promise is not a guarantee and it will usually be at a discount of around 10% to the net asset value at the time.
  • Because of this you should generally not invest in a VCT unless you happy to invest your money for at least 7 to 10 years.  Some VCTs set an objective to wind up after a set period so you will want to be aware of these if this is important to you.

As has already been mentioned, the features and risks associated with each VCT will vary.  There are three main divisions within VCTs and in order of increasing relative risk these are:

  • Generalist VCTs – A generalist VCT will have a relatively lower risk because of investing across a number of sectors of the market.
  • AIM VCTs – AIM is a form of company listing which does not meet the more stringent requirements of the London Stock Exchange listing.  AIM companies will tend to be younger growing companies although some very large successful companies choose to be listed on AIM.
  • Specialist VCTs – A specialist VCT might cover technology companies, or the healthcare sector, or entertainment etc.  The lack of diversification increases the risk.

You need to be aware of the investment strategy of the VCT manager and particularly as it relates to the 30% of the trust’s assets that do not have to be invested in ‘qualifying’ companies. 

At least 70% of the trust’s funds have to be invested in ‘qualifying’ companies within three years.  The other 30% can be invested in a range of different asset classes, not necessarily cash or bonds, and this feature will affect the overall level of risk to which your capital is exposed.

You should have some idea of the potential size of the VCT.  The larger the VCT the larger the deals that can be made and the greater the spread of investments.  In this respect some VCT managers are running a number of different VCTs so that larger investment can be made in total into the same companies.

You should be aware of the initial and ongoing costs of the VCT that you are considering in comparison to those charged by similar VCTs from other managers.

Would you prefer to invest in a brand new VCT so that your money is fed into the underlying investments over a period of three years and in the meantime much of it will be held on deposit or in other lower risk investments?  Alternatively, would you prefer to invest in a ‘C’ or ‘S’ share offering?  These allow existing VCTs to raise additional capital.  The advantage to you is that your money is put to work in the underlying companies as quickly as possible, and there may be a saving in costs as some charges may be shared with the original VCT.

‘C’ shares – this is the most common way of topping up an existing VCT.  Here your money is initially allocated to temporary C shares.  These are then converted on a net asset value (NAV) basis into the existing class of shares, once the new capital has been invested.

This avoids flooding the existing portfolio with cash, which could unfairly dilute the short-term performance of the existing shares to the disadvantage of the original shareholders.

‘S’ shares – these are not commonly available but do appear from time to time.  Here your money is allocated to permanent S shares.  These form a distinct and different portfolio which remains separate throughout the life of the VCT.  S shares have separate price quotes and net asset values.  Speed and cost are the main advantages of launching S shares over launching a new VCT.  An S share has been described as a perpetual C share.

VCTs are listed companies in the UK and their ‘business’ is to invest in other companies which may be listed on AIM or unquoted.  In this respect it is important to be aware that VCTs are not regulated by the Financial Conduct Authority (FCA).  You will therefore not have the same protection as if you invested in a unit trust company or UK life assurance company.

As we have seen, VCTs offer extensive tax reliefs.  Such relief will tend to reduce the risk of capital loss.  It is important, however, ‘not to allow the tax tail to wag the investment dog’.

The place of VCTs in financial planning

In view of the staggered investment period within the VCT clients should be willing to accept a minimum investment period of 7 years compared to 5 years for a typical unit trust, OEIC or Stocks and Shares ISA.  However the tax relief is not lost provided encashment is not within the first 5 years.

VCTs can be a good choice for investors who want to invest in UK smaller companies because of the additional tax incentives, although it is important to realise that the type of companies in a VCT are very much smaller than those found in a typical UK smaller companies unit trust, or other such collective investment.

VCTs can also be suitable for higher risk clients approaching retirement, who want to build up an additional source of tax-free retirement income.  Such income is very erratic, unlike pension income or more usual forms of investment income.  However, it is rather nice to receive unexpected tax free payments from time to time, as a top up to other forms of retirement income.

The typical £5,000 minimum investment for a VCT brings them within reach of a large number of investors.  It also presents an opportunity for investors to build up a portfolio of VCTs over time using a mix of different investment styles.

The ordinary shares of a VCT are listed in the Official List of the London Stock Exchange and you can sell them in the same way as any other listed investment.  However, it is important to be aware that whereas there will usually be others willing to purchase your BT, Vodaphone, HSBC, Barclays and GlaxoSmithKline shares, you may have to wait a long time before someone is found to buy your VCT shares especially when they may be able to get 30% tax relief by investing in new shares within that same VCT.

Ideally you should invest capital in a VCT that you may never need and instead you are content to receive an increasing (hopefully) tax free income stream over a number of decades.

If full VCT status is not received

This could be a serious issue for investors and emphasises the importance of only using those VCT managers who have experience of issuing previously successful VCTs. 

If full VCT status is not received and no further action is taken, investors will face repayment of the 30% tax relief, have to face a capital gains tax liability on capital gains, have any deferred gains revived and pay income tax on dividends.

The solution, however, for VCTs that find themselves in this situation is to merge with another VCT that already has approval. 

The situation on death

If an investor dies within 5 years of making an investment in a VCT, the transfer of shares on death is not treated as a disposal so the initial income tax relief is not withdrawn. 

Other points to note are:

  • The shares will become part of the deceased’s estate for inheritance tax purposes.
  • The executors are free to deal with the VCT shares in any way they see fit.
  • The beneficiary of the VCT shares will be entitled to tax-free dividends and will not pay capital gains tax on any disposal.

For these reasons it is important that VCT holders make their executors aware that VCTs are not just another shareholding especially if they want to pass on a tax free source of income to one or more of their beneficiaries.

How to claim income tax relief

You should claim the relief in your tax return for the year in which the shares were issued.  However, you do not necessarily need to wait until you send in your tax return to get the benefit of the relief.  You can do this once the shares which qualify for the relief have been issued to you by contacting your tax office.

If you pay tax under PAYE (Pay As You Earn), and want the relief immediately, you can ask your tax office to adjust your tax code.

If you do not pay tax under PAYE, but are due to make Self Assessment payments on account, you can, subject to certain conditions, make a claim to reduce these.  To receive the relief this way, please contact your tax office and ask them to tell you the qualifying conditions for making a claim to reduce payments on account and explain how to make a claim.  When making your claim, you must bear in mind that HMRC will charge you interest or penalties or both if your claim proves to be excessive.

Whether or not you claim relief in either of these ways, you must enter details of your investment on your tax return for the tax year in which your VCT shares were issued. The amount of relief you get cannot exceed your income tax liability for that year. 

For example, if you subscribe £30,000 for shares issued in the tax year 2020/2021 your maximum income tax relief would be £9,000.  However, if your income tax liability in that year before any income tax relief is obtained in respect of your VCT investment is £7,000 that is the relief you will receive.  The difference of £2,000 cannot be set off against the income tax liability of any other year.

The VCT will provide you with a certificate when you are issued with qualifying shares. Your tax office may ask you for this certificate when you claim income tax relief.

Alternative Investment Market (AIM)

As we have seen VCTs invest in small to medium sized unquoted trading companies in the UK.  Although ‘unquoted’ means that the companies are not listed on a recognised stock exchange, companies who are solely on the Alternative Investment Market (AIM) of the London Stock Exchange or on two of the PLUS Markets are unquoted companies. 

AIM was created in 1995 by the London Stock Exchange principally to offer a diverse range of smaller growing businesses in the UK the opportunity to sensibly raise capital in a regulated market.  AIM is now a brand with global recognition.  Since its launch in 1995, over 3000 companies have joined AIM – raising more than £60 billion in new and further capital fundraisings.  Businesses range from new venture capital-backed companies to well-established, mature organisations looking to expand into a wider market.  Many companies listed on AIM have made the transition to the Main Market.

AIM has three investment indices – the FTSE AIM UK50, FTSE AIM100 and the FTSE AIM All-Share Supersector Indices.  Shares and securities traded on AIM are not treated as quoted or listed for tax purposes.

AIM is wholly-owned and run by the London Stock Exchange whose trading platforms are the most sophisticated in the world.  AIM falls within the definition of a ‘prescribed market’ under the Financial Services and Markets Act 2000 and is subject to the UK market abuse regime.  Under the European Union directives AIM is not a regulated market but instead falls within the classification of a ‘multilateral trading facility’ as defined under the Markets in Financial Instruments Directive 2004 (MiFID).

Stocks on AIM can now be held within a Stocks and Shares ISA.

British Private Equity & Venture Capital Association

The British Private Equity & Venture Capital Association (BVCA) is the industry body and public policy advocate for the UK private equity and venture capital industry.  

The BVCA website has a lot of background information about the venture capital industry, this type of investment, and particular VCTs.

Association of Investment Companies

The Association of Investment Companies (AIC) represents many VCT fund managers and further information can be found on their website

Risk Factors

You should be aware that you should view a VCT as a high risk and long term investment.  The tax incentives being offered to investors should warn you that these are necessary because of the high risk of loss.  By ‘long term’ I mean at least 7 years, but you would be well advised to consider it as a 7 to 10 year investment.  The underlying assets in a VCT are by nature highly illiquid.  This means that you may have difficulty in selling your shares for anything like their underlying net asset value. 

Please make sure that you clearly understand each of the main risks of investing in VCTs:

  • VCTs invest in small UK companies – Investment in AIM traded and other unquoted companies may involve greater risk than investment in companies traded on the main market of the London Stock Exchange.  VCTs invest in companies with gross assets of not more than £7 million prior to investment.  Such companies generally have a higher risk profile than larger ‘blue chip’ companies.
  • The spread between the buying and selling price of such companies’ shares may be wide and thus the mid-market price used for valuation may not be achievable in the event of sale.
  • Furthermore, the failure rate of these is typically much higher than that of larger companies.  Smaller companies often have limited product lines, markets or financial resources and may be dependent for their management on a smaller number of key individuals.  Proper information for determining their value or the risks to which they are exposed may also not be available.  Smaller companies are less likely to have multinational markets for their products or services than large companies and, as a result, may be more exposed to national economic cycles rather than global economic cycles.
  • VCTs are inherently illiquid – There is currently no effective secondary market for VCT shares, primarily because the initial income tax relief is only available to those subscribing for newly issued shares.  Therefore, there will most likely be an illiquid market and investors may find it difficult to realise their investment, especially during the early years of the life of the fund.  The underlying investments are primarily in small companies.  The fact that a share is traded on AiM does not guarantee its liquidity. 
  • There will be fewer buyers and sellers of securities in smaller companies than of securities in larger companies, bringing with it potential difficulties in acquiring, valuing and disposing of such securities.  This compounds the difficulties shareholders may encounter when attempting to sell VCT shares.
  • These investments may be extremely difficult for fund managers to realise at fair value, and therefore shareholders may not be able to dispose of shares at a price that reflects the value of the underlying assets.  Any buy-back policies in place are always subject to liquidity.  The future realisation of shares at, or close to net asset value can never be guaranteed by a VCT manager.
  • VCTs must be held for at least 5 years – If shares are sold within this period, the initial tax relief will be required to be repaid.  Whilst it is the intention of the Directors of a VCT that that the fund will be managed so as to qualify as a VCT, there can be no guarantee that it will qualify, or that such status will be maintained.
  • A failure to meet the qualifying requirements could result in the fund losing the tax reliefs previously obtained, resulting in adverse tax consequences for investors including a requirement to repay the income tax relief.  VCT managers have three years from the issue of shares to invest 70% of the fund’s assets in qualifying companies.
  • If this is not achieved the fund’s status as a VCT is risked meaning investors could lose their tax relief.  There are also additional requirements that VCTs must meet – if these are not met HMRC may withdraw the fund’s status as a VCT and associated tax reliefs.  There can be no guarantee that the trust’s VCT status will be achieved within the three year limit.
  • Levels and bases of, and relief from, taxation are subject to change and their value depends on an investor’s individual circumstances.  Such changes could be retrospective.
  • VCTs are long term investments – VCTs are designed to give shareholders their capital gain through a tax free dividend stream.  There is, however, no certainty that any dividends will be paid.  Although investors may be free to dispose of their holding after 5 years (in order to retain their initial income tax relief) investors should expect to retain their shares for no less than 7 years, and I recommend that investors expect to consider this as a 7 to 10 year investment.
  • VCTs usually trade at a discount – VCTs are quoted on the stock exchange and, like investment trusts, usually trade at a discount to net asset value, which reflects the likely realisable value of the assets at any given time relative to the net value of the assets.
  • VCTs may not have sufficient critical mass – Investors should be aware that a VCT usually requires assets of at least £10 million in order to achieve a spread of investments and thus lower company specific risk within the portfolio.
  • To the extent that a relatively small level of funds is raised by the particular VCT, the manager may not be able to diversify its portfolio sufficiently.  This in turn increases the risk and such a VCT is likely to prove more costly to manage.  There can be no guarantees that the VCT will meet its objectives or that suitable investment opportunities will be identified. 
  • VCTs are complex investment products – The investment strategies employed by VCT managers differ enormously.  VCTs are complex investment products and are only suitable for investors with a more adventurous attitude to risk.
  • To understand the likely nature of the underlying investments, timeframe and return expectations, we strongly recommend individuals considering a VCT investment contact an IFA who specialises in this market.
  • There may be sudden and large falls with this type of investment.  There is a risk that investors might not get back any of their original investment.  The past performance of VCTs generally, or any one VCT in particular, cannot be taken as a guide to possible future performance.
  • The value of shares in a VCT and the income from them may fall as well as rise and investors may not get back the amount originally invested.  Investors should always read the full VCT Securities Notes and pay particular attention to the risk warning notices which they contain. 




This information does not constitute personal advice and should not be treated as a substitute for specific advice based on your circumstances.

Information given relating to tax legislation is based on my understanding of legislation and practice currently in force. Whilst I believe my interpretation of current law and practice to be correct in these areas, I cannot be responsible for the effects of any future legislation or any change in interpretation or treatment. In particular you are warned that levels of tax and tax reliefs are subject to alteration and, in any case, the value of such reliefs and benefits may depend on an individual’s circumstances.

If you are in any doubt as to whether any course of action is suitable for you, then you should discuss the matter with a suitably qualified independent financial adviser or other specialist.