Investing in young companies can be rewarding but is also risky. Some of these companies might do very well, but inevitably others will struggle and some will fail.
The Venture Capital Trust tax reliefs provide a valuable buffer against this risk. They mitigate the impact of investments that don’t work out and amplify the impact of investments that do well.
VCT tax reliefs at a glance
- Up to 30% tax relief (reducing to 20% from 6 April 2026) – save up to £60,000 on your income tax bill when you invest in newly issued VCT shares
- Generous allowance – invest up to £200,000 per tax year
- Tax-free dividends – no need to declare VCT dividends on your tax return
- Tax-free growth – no CGT on gains
Tax rules can change and benefits depend on circumstances. This is a brief outline based on current rules: there are detailed conditions and rules you should consider carefully before investing. If unsure, seek advice. These are high-risk investments and you should invest on the merits of the investment, not for the tax advantages alone. Dividends are variable and not guaranteed.
Up to 30% income tax relief
You can invest up to £200,000 in VCTs per tax year, and receive tax relief of up to £60,000. To benefit, you must have paid or owe as much tax during the tax year in which you invest. You must hold the investment for at least five years to retain the relief.
In the 2025 Budget it was announced that the rate of income tax relief will change to 20% from 6 April 2026.
Tax-free income
Although most VCTs are growth investments, and any growth is tax free, the majority of returns (if any) are normally paid through tax-free dividends. After the sale of a successful company within the portfolio, the profit can be distributed to investors as a larger or special dividend, and the remaining capital reinvested in new opportunities. So, a diverse, well established VCT portfolio can therefore produce a satisfying stream of dividends throughout the year.
Moreover, the fact VCT dividends are tax free could be of significant value, especially now the tax-free allowance for dividends has been cut to just £500.
If a VCT pays a 5% dividend, that means 5p in your hand for every £1. To match that, assuming the dividend allowance has already been used, a higher-rate taxpayer would have to get a taxable dividend of 7.55% (8.24% for a top-rate taxpayer).
Are VCTs subject to inheritance tax?
We are sometimes asked whether Venture Capital Trusts, particularly AIM VCTs, qualify for inheritance tax relief in the same way that an AIM ISA does.
AIM VCTs do not qualify for IHT relief, even though their underlying holdings might. This is because when you invest in a VCT, you acquire shares in the VCT itself (listed on the main market of the London Stock Exchange), not in its underlying holdings listed on AIM.
It is only when you hold shares directly in a company that qualifies for BPR that your investment could qualify for IHT relief.
If IHT mitigation is a priority, you might consider AIM IHT ISAs. Investments under the EIS and SEIS schemes can also be IHT free.