Growing pains for VCTs
Managers explain the changes to VCTs
Venture capital trusts (VCTs) provide investment to some of the UK’s most innovative young companies. At the Budget, the government announced plans to cut upfront tax relief on VCTs from 30% to 20% while changing the rules to allow VCTs to make larger investments. Advisers warn that Budget cuts to VCT tax relief will hit fundraising, with 75% reporting lower appetite.
“VCTs are critical in providing some of the UK’s most exciting growth companies with money to scale up. VCT-backed companies have generated thousands of jobs and boosted economic growth across sectors like tech and healthcare.”
To discuss how VCT managers will adapt to the changes, a media roundtable was hosted on 26 January by the Association of Investment Companies (AIC) featuring Jamie Roberts, Managing Partner of YFM Equity Partners, which manages the British Smaller Companies VCTs, Rupert West, Fund Manager of Puma VCT 13 and Andrew Wolfson, CEO of Pembroke Investment Managers, which manages Pembroke VCT. Their comments are collated below together with remarks from Stuart Veale, Managing Partner of Beringea, which manages the ProVen VCTs and James Livingston, Partner at Foresight Group, which manages the Foresight VCTs.
Tax cuts and difficult markets: what's next for VCTs? (viewing time, 22:37 minutes)
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “VCTs are critical in providing some of the UK’s most exciting growth companies with money to scale up. VCT-backed companies have generated thousands of jobs and boosted economic growth across sectors like tech and healthcare. While the increases to VCTs’ investment limits are welcome, we believe the government should urgently reconsider the planned cut to tax relief which will hit future fundraising. This will undermine VCTs’ ability to support scale-up businesses and harm the government’s growth ambitions.”
What the VCT tax changes mean for managers and investors
Andrew Wolfson, CEO of Pembroke Investment Managers, which manages Pembroke VCT, said: “The most immediate and concerning implication of the Budget’s changes to VCT tax relief is the very real risk of reduced cash inflows into the VCT sector. VCTs are highly sensitive to investor incentives; history shows clearly that when tax relief is reduced or becomes uncertain, fundraising volumes fall.
Why do investors use VCTs and what are the benefits? (viewing time, 4:23 minutes)
“For VCT managers, lower inflows directly translate into less capital available to deploy into early-stage and growth companies. That matters because VCTs play a critical role in funding businesses that are often too early, too small, or too innovative to access traditional bank finance or later-stage private equity.
“For investors, the impact is twofold. First, a reduction in inflows weakens the overall ecosystem that supports innovation, job creation, and regional growth. Second, it risks making the VCT market less diverse and less dynamic, as fewer funds are raised and fewer new investments are made. In short, if less capital comes into VCTs, less capital will reach the early-stage companies the policy was designed to support.”
James Livingston, Partner at Foresight Group, which manages the Foresight VCTs, said: “Reducing the incentive for private investors to back UK growth companies is a surprising move from a government which has claimed to be focused on driving growth. For investors in the short term, it means a rush for this year’s VCT investment as investors look to maximise current tax relief, but the longer-term effect is likely to be less capital available for innovative UK businesses. We expect it will drive some consolidation in the market favouring managers with scale, track record and distribution.”
Jamie Roberts, Managing Partner of YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “It is too early to tell what the impact will be on the VCT market when the initial tax relief reduces from 30% to 20% from 6 April 2026. Nevertheless, the feedback we have received from a number of wealth managers since the Budget, confirms that they continue to see VCTs as an important investment product for their clients.
“These changes had been called for by our industry bodies in the build-up to the Budget and we were delighted to see the announcement to increase the annual and lifetime investment limits and the gross assets test. These enhancements will enable VCTs to provide greater support, for longer, to portfolio businesses that are scaling rapidly.”
VCTs: which areas of the market are currently offering the strongest opportunities? (viewing time, 3:24 minutes)
“Even if 2026/27 does prove to be a tougher VCT fundraising environment due to the reduction in tax relief, we would still expect those VCTs with strong performance track records and established shareholder followings, such as the British Smaller Companies VCTs, to be able to raise the new capital they are targeting.”
Changes to annual and lifetime investment limits and the gross assets test
Rupert West, Fund Manager of Puma VCT 13, said: “The Budget broadens what VCTs can do which is good news for investors. By allowing VCTs to back larger, later-stage rounds, the investible universe expands and the quality of opportunities improves. Practically, it means we can be a more valuable partner to the most attractive scale-ups and support our winners for longer, so investors get exposure to a more mature, better diversified portfolio over time.
“The Budget broadens what VCTs can do which is good news for investors. By allowing VCTs to back larger, later-stage rounds, the investible universe expands and the quality of opportunities improves."
“The trade-off for investors is a reduction in the VCT income tax relief from 30% to 20%, which means less upfront relief, but the potential for stronger risk-adjusted outcomes as VCTs support more mature, faster-growing businesses.
“For Puma VCT 13 specifically, the changes play to our strengths. Our strategy is already focused on ambitious UK scale-ups with proven market traction, not startups, so we don’t need to change our investment approach to benefit. The increased limits simply give us more runway to follow success.”
“The increases to annual and lifetime investment limits, and the relaxation of the gross assets test, are welcome in isolation. They give VCTs greater flexibility to provide meaningful follow-on capital to portfolio companies that are scaling well and need additional funding to succeed.”
Stuart Veale, Managing Partner of Beringea, which manages the ProVen VCTs, said: “The government’s decision to increase VCT funding limits was a vital step forward for UK entrepreneurs – we were pleased to see policymakers recognise that innovative, scale-up companies must be able to access the capital they need throughout their growth journey, if the UK is to build international success stories. For investors in VCTs, it also ensures that their investment can be used to continue backing winners as they scale – too often, VCTs were being restricted from backing successful businesses when they reached the VCT funding limits.”
Tax cuts and difficult markets: impact of reducing upfront tax relief from 30% to 20%. (viewing time, 4.26 minutes)
Jamie Roberts, Managing Partner of YFM Equity Partners, which manages the British Smaller Companies VCTs, said: “These changes had been called for by our industry bodies in the build-up to the Budget and we were delighted to see the announcement to increase the annual and lifetime investment limits and the gross assets test. These enhancements will enable VCTs to provide greater support, for longer, to portfolio businesses that are scaling rapidly.
“There are several portfolio companies that we expect the British Smaller Companies VCTs will now be able to invest larger amounts into than was possible before the rule changes. Being able to provide more capital, particularly follow-on funding, helps to increase round certainty, reduces the risk of funding ‘cliff edges’ for investee companies and gives confidence to larger co-investors in later rounds.”
Andrew Wolfson, CEO of Pembroke Investment Managers, which manages Pembroke VCT, said: “The increases to annual and lifetime investment limits, and the relaxation of the gross assets test, are welcome in isolation. They give VCTs greater flexibility to provide meaningful follow-on capital to portfolio companies that are scaling well and need additional funding to succeed.
“However, there is an important unintended consequence if these changes coincide with a reduction in overall capital inflows. If VCTs are raising less money, but are permitted to invest more per company, rational capital allocation will naturally tilt towards existing portfolio companies, where risk is better understood and capital can be deployed with greater confidence.
“The net effect is that new companies, particularly first-time founders or businesses at the very earliest stages, may find it harder to access VCT funding. A shrinking funding pot combined with higher per-company limits concentrates capital rather than broadening access to it. That is a challenge for the wider startup ecosystem and runs counter to the original purpose of the VCT scheme, which was to widen the funnel of funded early-stage businesses.” For further manager insights, please read the full press release.
Tax cuts and difficult markets: good news in the Budget (viewing time, 3:33 minutes)
