What are VCTs and how to invest in them?

Understanding Venture Capital Trusts

Venture Capital Trusts are publicly listed companies designed to provide retail investors with access to early stage and growth businesses. Introduced in 1995, VCTs were created by the UK government to encourage investment in smaller, unquoted companies that might otherwise struggle to raise capital.

These trusts operate under strict regulatory guidelines set by HMRC, which govern everything from the types of companies they can invest in to the proportion of funds that must be deployed.

Each VCT functions as a professionally managed portfolio, typically holding stakes in 30 to 80 different companies across various sectors. This diversification helps spread risk across multiple investments, though the underlying companies themselves tend to be higher risk than those found in mainstream equity funds.

Fund managers actively work with portfolio companies, often taking board positions and providing strategic guidance alongside capital.

The trust structure means investors buy shares in the VCT itself rather than directly in the underlying companies. Share prices fluctuate based on the net asset value of the portfolio and market demand, and shares can be bought or sold through stockbrokers just like any other publicly listed security. However, VCT shares often trade at a discount to their net asset value, particularly in the secondary market.

VCTs must meet qualifying criteria to maintain their tax-advantaged status. At least 80% of funds must be invested in qualifying holdings within three years of raising money, and at least 70% must be invested in eligible equities.

The companies they invest in must have gross assets of no more than £15 million before investment and £16 million after, and they must carry on a qualifying trade. These rules ensure VCTs focus on genuinely small, growing businesses that need capital rather than mature companies with easy access to traditional funding sources.

Tax advantages of VCT investments

The primary attraction of VCTs lies in their substantial tax benefits, which can significantly enhance returns for eligible UK taxpayers. When you invest in a VCT through the primary market, you can claim income tax relief of 30% on investments up to £200,000 per tax year, though this is falling to 20% in the 2026/27 tax year.

This means that at present, a £10,000 investment could reduce your income tax bill by £3,000, effectively lowering your net cost to £7,000. To qualify for this relief, you must hold the shares for at least five years, and the relief is only available to individuals, not companies or trusts.

Beyond the upfront income tax relief, VCTs offer ongoing tax advantages that continue throughout your investment journey. Any dividends received from VCT shares are completely tax free, regardless of your income tax bracket or the size of your holding. This makes VCTs particularly attractive for higher-rate taxpayers seeking tax-efficient income.

Additionally, any capital gains you make when selling VCT shares are exempt from capital gains tax, provided the shares were acquired within the annual investment limit and you've held them for the required period.

It's worth noting that tax rules can, and are expected, to change, and the availability of tax relief depends on your individual circumstances. The upfront income tax relief is only claimable on new share issues in the primary market; purchasing existing shares on the secondary market does not qualify for this 30% relief, though the tax free dividends and capital gains exemption still apply.

Some investors use VCTs strategically to manage their overall tax position, particularly when facing a higher tax bill in a given year or when planning their retirement income.

Primary market vs secondary market

The primary market represents brand new share issues when a VCT is raising fresh capital from investors. These fundraising rounds typically happen once or twice a year, often around the end of the tax year when demand is highest. When you invest in the primary market, your money flows directly to the VCT, which then deploys it into new or existing portfolio companies.

This is where the income tax relief applies, making primary market investment particularly tax-efficient for eligible investors who can afford to lock up their capital for five years.

The secondary market operates like a standard stock exchange, where existing VCT shares are traded between investors. Here, you're buying shares from another investor rather than from the VCT itself, so your money doesn't go directly into funding small businesses. Secondary market shares frequently trade at a discount to their net asset value, sometimes 10% to 30% below the value of the underlying portfolio.

While you won't receive the 30% upfront income tax relief on secondary market purchases, you'll still benefit from tax free dividends and capital gains exemption on any profit when you eventually sell.

The choice between primary and secondary market investment depends on your priorities and circumstances. Primary market investment offers maximum tax efficiency but requires you to pay full net asset value and commit for five years to retain the income tax relief. Secondary market

investment provides immediate access to established portfolios, often at a discount, with more flexibility around timing and holding period.

For investors who've already used their annual VCT allowance, need liquidity before five years, or simply want to acquire shares at below net asset value, the secondary market can be a suitable alternative.

How to invest in VCTs with us

We typically only offer secondary market VCT trading. This means you can invest in established VCTs with proven track records, often at attractive discounts to net asset value, without waiting for the next primary market fundraise.

While secondary market purchases don't qualify for the income tax relief, you'll still receive all dividends tax free and won't pay capital gains tax on any profits, making them a tax-efficient investment in their own right.

Investing through our platform is straightforward and gives you the flexibility to build a VCT portfolio that matches your risk tolerance and investment goals. You can browse available VCTs, compare their performance histories, dividend yields and portfolio compositions, then purchase shares at prevailing market prices.

Because you're buying on the secondary market, there's no five year holding requirement to retain tax benefits, though VCTs remain medium to long-term investments best suited to patient capital.

Before investing, consider carefully whether VCTs align with your overall financial situation. These are higher-risk investments in small, growing companies, and you could lose some or all of your capital.

It can often make sense to speak to an independent financial adviser who can assess whether VCTs are appropriate for your circumstances and help you navigate the various options available.

Top VCTs to watch

Here are three of the most popular VCTs you can invest in through our secondary market platform:

Mobeus Income & Growth VCT

Focuses on established, profitable businesses capable of generating regular dividends. Invests across diverse sectors including technology, healthcare, and business services. Aims to provide steady income alongside capital growth potential. Suitable for investors seeking balance between income generation and growth.

Triple Point Venture VCT

Specialises in venture capital investments in innovative, high-growth companies. Strong focus on technology and digital businesses with significant scaling potential. Experienced management team with track record of successful exits. Higher risk profile but potential for substantial capital appreciation.

Foresight Solar VCT

Targets renewable energy and sustainable technology companies aligned with environmental transitions. Diversified portfolio across solar, energy storage, and clean technology sectors. Provides exposure to growing sustainability themes while maintaining VCT tax benefits. Appeals to investors seeking both financial returns and positive environmental impact.

Pros and Cons of VCT Investment

Like any investment, VCTs come with their own set of advantages and drawbacks.

Pros of VCTs

• Generous tax relief — Upfront income tax relief on primary market investments up to £200,000 annually, plus tax free dividends and capital gains exemption regardless of purchase method
• Access to high-growth potential — Exposure to early-stage and growth companies typically unavailable to retail investors, with the potential for substantial returns if portfolio companies succeed
• Professional management — Experienced fund managers actively support and guide portfolio companies, handling due diligence, monitoring and exit strategies on your behalf
• Built-in diversification — Each VCT typically holds 30 to 80 different companies across various sectors, spreading risk across multiple investments within a single fund
• Secondary market flexibility — Ability to purchase existing shares at discounts to net asset value without waiting for primary market fundraises, while still enjoying tax-free dividends and capital gains

Cons of VCTs

• Higher risk profile — Underlying companies are often young, unquoted businesses with uncertain prospects. Many will fail, and you could lose some or all of your invested capital despite the tax benefits
• Limited liquidity — Low trading volumes, wide bid-ask spreads and potential delays in finding buyers. Shares often trade at significant discounts to net asset value, making them unsuitable for short-term needs
• Tax relief clawback — If you sell primary market shares within five years, you must repay the income tax relief, potentially creating an unexpected tax liability
• Performance uncertainty — Poor-performing VCTs can lose 40% or even more of their value, leaving you worse off even after tax relief. Returns depend heavily on fund manager skill and market conditions
• Regulatory and tax risk — Government policy changes could affect future tax benefits or qualifying criteria, potentially reducing the attractiveness of VCT investments

VCTs summed up

• Primary market investment provides 30% income tax relief on up to £200,000 annually, but requires a five-year holding period to retain the benefit. All VCT dividends are tax free and capital gains are exempt from CGT regardless of purchase method
• Secondary market VCT shares offer immediate access to established portfolios, often at discounts to net asset value, without the five-year restriction. While they don't qualify for upfront income tax relief, they retain the dividend and capital gains tax advantages
• VCTs invest in higher-risk small companies, meaning capital loss is a real possibility despite the tax benefits. Diversification across multiple VCTs and within your broader portfolio helps manage this risk, but VCTs should represent only a portion of your total investments
• Our platform specialises in secondary market VCT trading, giving you access to established trusts like Income & Growth VCT, Triple Point Venture VCT, and Foresight Solar and Technology VCT. Each offers different sector exposures and investment strategies to match varying risk appetites and objectives