A new chapter for VCTs post-Budget

The November 2025 Budget sent shockwaves through the tax-efficient investment landscape. After nearly two decades of stability, the government announced that upfront income tax relief for Venture Capital Trust (VCT) investors will drop from 30% to 20% from 6 April 2026.

The timing is particularly surprising given the recent extension of the VCT sunset clause to 2035 and the relatively modest fiscal gain for the Treasury - estimated at only £125m by 2027/28.

 

Why has the reaction been so strong?

Research by HMRC¹ confirms that upfront tax relief is the single biggest motivator for VCT investment. While the Budget also increased investment limits for qualifying companies - a positive step for scaling businesses - the initial market reaction has been extremely critical.

Some analysts predict fundraising could fall by more than 60%, which would inevitably impact capital flows to early-stage, high-growth businesses. History offers a warning: when relief fell from 40% to 30% in 2006, subscriptions slumped and took over a decade to recover.

 

Short-term outlook: a race against time

In the months ahead, demand is expected to surge as investors seek to lock in the 30% relief before April 2026. Many VCTs have already opened their fundraising early, meaning capacity is quickly becoming limited. Advisers who haven’t yet spoken to clients about using their allowance should act quickly - this is very much a “use it or lose it” moment.

 

Long-term perspective: there is still a place for VCTs

Will this change diminish VCTs’ role in financial planning? We don’t believe so.

Tax pressures are increasing: frozen income tax thresholds, higher dividend and savings taxes, reduced ISA allowances and ongoing pension restrictions. Against this backdrop, VCTs remain one of the few tools offering tax-free dividends, CGT-free growth, and now 20% income tax relief - still an advantage that should not be overlooked.

Performance reinforces the case. Over the past five years, the ten largest VCT managers delivered an average cumulative total return of 24.3%, rising to 58.1% over ten years². These figures exclude tax benefits, which further enhance overall returns.

 

What should advisers prioritise?

The reduced relief makes risk assessment even more critical. VCTs remain illiquid with a higher risk profile, so advisers should focus on:

• Manager experience and track record
• Portfolio diversification and quality
• Dividend history and NAV performance
• Financial strength and governance

There will be an inevitable flight to quality from investors and choosing the right manager will be critical to help balance the risk and reward. 

 

Foresight’s position

As a FTSE250 company managing £13.2bn across real assets and private equity, Foresight is one of the largest VCT managers in the UK. Our four VCTs span three distinct strategies, all helping to grow companies:

• Early-stage deep tech, backing early-stage businesses with innovative and potentially transformative technologies
• Later stage venture capital, investing in companies developing disruptive software and AI
• Our flagship generalist VCTs invest in more mature, fast-growing UK enterprises

Beyond investment opportunities, we provide advisers with insights and tools to navigate this evolving landscape confidently.

 

The bottom line

The VCT market has weathered storms before and emerged stronger. While the reduction in tax relief is far from ideal, VCTs remain a cornerstone of tax-efficient investing and a vital source of funding for UK innovation. Today, the sector manages £6.5bn, supports over 1,000 companies, and sustains more than 100,000 jobs nationwide.

Final call for VCTs? Absolutely not. This is simply the start of a new chapter.

 

¹ Kantar Survey 2023

² Wealthclub