VCT Tax Relief Cut to 20%: What It Means for Investors and Smaller Companies

What has changed for VCT investors?

The Government announced at the 2025 Autumn Budget that upfront Income Tax relief for investors subscribing for new VCT shares would fall from 30% to 20% from 6 April 2026.

What VCT tax benefits stay the same?

The other key tax benefits are unchanged. Dividends from VCTs are generally free of Income Tax, and gains on the disposal of VCT shares are exempt from Capital Gains Tax. A minimum holding period and wider qualifying conditions apply to keep the tax relief.

What has changed for companies raising VCT funding?

Alongside the investor changes, the Government has updated the rules for the companies VCTs invest in. The most notable change is that the annual investment limit has doubled from £5 million to £10 million for most qualifying companies. Higher limits apply to knowledge-intensive businesses.

Why did the Government reduce VCT tax relief?

The Government says the cut is intended to better balance the upfront relief available through VCTs and the Enterprise Investment Scheme (EIS), because VCT investors also receive tax-free dividends. It also says the change should encourage VCT managers to seek higher returns and focus on the highest-growth companies.

The Treasury's published costings expect a small increase in Exchequer receipts. However, investor responses could change that figure considerably.

How has the change affected VCT fundraising?

It is too early to know the full effect. VCT fundraising is seasonal, starting in earnest in the autumn and running until the end of the tax year, so a clearer picture should emerge over the coming months.

Early indications suggest the market expects lower investment levels under the reduced relief. The Association of Investment Companies (AIC) reported that VCTs raised £918 million in 2025/26, the third-highest annual total on record, as investors moved to secure 30% relief before the change. That late surge in March 2026 may itself dent fundraising this year, if investors brought forward money they would otherwise have invested later.

Why does this matter for UK businesses?

The effect reaches beyond investors. VCTs are an important source of capital for smaller and growing UK businesses. These changes come against a backdrop of tight monetary and fiscal conditions for domestic businesses, and it remains to be seen whether the higher company limits can offset any fall in new money flowing into VCTs.

• What is the VCT Income Tax relief rate now?

  For new VCT shares subscribed for from 6 April 2026, upfront Income Tax relief is 20%, down from 30%.

• Are VCT dividends still tax-free?

  Yes. Dividends from VCTs are generally free of Income Tax.

• Do I pay Capital Gains Tax when I sell VCT shares?

  Gains on the disposal of VCT shares are exempt from Capital Gains Tax, provided the qualifying conditions are met.

• Why was VCT tax relief cut?

  The Government wants to better balance VCT relief with EIS relief and encourage VCTs to focus on the highest-growth companies.

• Are VCTs high risk?

  Yes. VCTs invest in smaller, higher-risk companies and can involve a significant risk of loss. They should only be considered as part of a diversified portfolio, where appropriate.