How VCTs can give you access to Britain's tech start-ups

Venture capital trusts – VCTs – offer smart investors more than tax relief. They also provide an interesting route into the UK technology sector.

Venture capital trusts (VCTs) may offer a useful way to invest in the UK tech sector. Critics regularly point out that Britain has few major technology companies able to compete globally, a concern that has grown sharper in the age of AI. That criticism has some basis: the country lacks household names comparable to Google or Anthropic. Still, British technology is broader and deeper than its public profile suggests.

Examples are plentiful. Founded only ten years ago, Quantexa now has a valuation of £2.6 billion; the company develops software for data analysis and AI. Thought Machine, which builds AI and cloud-computing tools for banks, is worth about the same. ManyPets, an "insurtech" company, has reached a £2 billion valuation.

All three unicorns - start-ups that reached billion-dollar valuations - received venture capital trust funding in their early years. Other VCT-backed technology companies are already emerging behind them, including Resurrect Bio, which applies AI to gene editing in agriculture; Spaceflux, whose technology helps governments and commercial operators track objects in Earth's increasingly crowded orbit; and CreativeX, an AI-powered content company.

Ken Clarke would likely welcome the figure. He introduced VCTs in 1994 to direct investment towards young British companies with the potential for rapid growth, and the former chancellor still supports the industry. He recently criticised the changes to tax relief for VCT investors, which took effect at the beginning of the current tax year. New VCT share investments made since 6 April continue to qualify for 20% upfront income-tax relief. That means the maximum contribution of 200,000 would cost 160,000, although the relief has fallen from 30%.

Alex Davies, CEO of Wealth Club, which specialises in VCT investments, says the reduction is already being felt. Fundraising during the 2025-2026 tax year nearly reached a record as investors rushed to secure the higher upfront relief before it disappeared. The 2026-2027 tax year has moved much more slowly so far. "The impact has been stark," Davies says. "Since September, the three most established VCTs to launch offers have each raised more than 70% less than they had at the same point in last year's fundraising."

Like many people in the sector, Davies was disappointed that the new chancellor, John Healey, left the cut to tax relief in place - even after reversing other measures introduced by his predecessor.

"We heard a lot in the Budget about directing money toward startups and scale-ups," says Davies. "But the government has reduced VCT relief, even though VCTs already bring substantial private investment into those businesses. Why weaken a system that works? Restoring relief to 30% would have been the obvious first step."

VCTs have a proven track record

VCT fundraising could recover, so there is little sense in rejecting a workable option because it is no longer perfect. "VCTs still offer 20% upfront relief, tax-free dividends and exposure to promising British businesses," Davies says. "They may be less attractive than before, but that does not make them unattractive - particularly when taxes are high and there are so few ways to protect your money from them."

The last point matters. Dividends and capital gains held through a VCT remain free of tax, but tax rates on both have risen in recent years and the relevant allowances have been cut. Other tax-efficient options have lost ground too: the 20,000 individual savings account (ISA) allowance has not increased since 2017, which means inflation has reduced its real value. Private pensions will soon fall within the scope of inheritance tax, making them less appealing to many families.

But VCTs should not be bought simply for their tax advantages. The investment itself has to stand up, and the prospects for growth matter most. Technology looks particularly interesting in the current market. "VCTs are backing the most ambitious British companies in sectors from AI to advanced manufacturing and helping the government deliver its industrial strategy," says Richard Stone, CEO of the AIC. "They invest at an early stage of a company's development, and VCT funding is often the catalyst to help those companies expand, create new jobs, or compete internationally." That does not mean every VCT is focused on technology. Some spread their money across several industries, while others concentrate on particular parts of the country. Earlier VCT successes include property website Zoopla, food-delivery service Gousto and clothing marketplace Depop.

"We're investing in founders, ultimately," says Andrew Wolfson, CEO of VCT manager Pembroke. The aim is to find exceptional founders and promising business ideas as early as possible. That may require meeting 1,000 companies before choosing just ten investments. "The model has been tested, and our portfolios include some excellent businesses," he says. Still, investors have to accept that these companies may take years to reach their potential. "Anyone calling them three-year investments is talking nonsense." Some will certainly fail along the way. The VCT structure spreads exposure across a portfolio of early-stage companies, which offers some protection. Still, managers may depend heavily on five to ten standout holdings to generate most of the fund's overall returns. A single failure can hurt badly: when Honest Brew collapsed recently, one VCT lost more than 3 million.
Choosing VCTs and their managers carefully matters here. This is not an area where every fund rises with the market; the gap between the strongest and weakest performers can be substantial. Past results deserve attention, though they cannot predict what comes next. A manager who has raised money, invested it and achieved exits successfully over several years has shown the experience needed to judge opportunities well. That history may also point to a useful network and a steady stream of potential deals. When a manager is raising money for an existing fund rather than starting a new vehicle, investors have something concrete to examine: the current portfolio. How mature are those companies, and how well are they performing? Is the portfolio properly diversified?

Start with established names in the VCT sector

Technical details matter here. VCTs often use proceeds from successful investments to pay dividends, giving shareholders valuable tax-free income. Managers may not distribute exit proceeds in full or immediately, though. Since their fees depend on the fund's asset value, they may have little financial incentive to do so. Check the manager's policy on this point.

VCTs can cost considerably more than traditional funds. Annual charges may reach 3.5%, and some managers add performance fees. Check whether one applies and how it is calculated: the fee may be based on an estimated net asset value, which reflects a subjective valuation rather than a realised gain.

Buying VCT shares early in the tax year can reduce the cost, since funds often offer "early-bird" discounts. Managers expect many investors to postpone tax-incentivised decisions until the final months or weeks, so they use these offers to encourage earlier commitments. About 15 managers have already started promoting new funds or share issues for existing VCTs this tax year. Discounts should not decide which fund you choose - or whether a VCT suits you at all; those decisions should rest on the investment case. Still, anyone planning to invest during the 2026-2027 tax year should seek the best available deal, especially since the most popular funds can sell out.

VCTs vary considerably. Someone new to them might find a generalist fund easier to start with, since it spreads investments across several industries and may include companies listed on Aim, the junior market. Davies advises beginning with established, diversified VCTs and only then considering newer funds.

If you already hold several funds of this kind, a specialist option may deserve a look this year. Octopus Investments is marketing a generalist fund alongside two separate vehicles: one for software companies and another for businesses tackling major social challenges. Other managers focus on areas such as digital companies, healthcare, or business services.

How the VCT rules work

At least 80% of a VCT's assets must go into qualifying holdings. These are generally companies with no more than 30 million in assets, fewer than 250 employees and a trading history of seven years or less. A VCT spreads its money across several such businesses, with each investment capped at 15% of the fund's total investments.

A range of tax breaks limits the downside for investors. The main one is 20% upfront income-tax relief on up to 200,000 invested in new VCT shares during each tax year. The shares must be held for at least five years; otherwise, the relief has to be repaid. Dividends and capital gains from VCT shares are also tax-free, so they do not need to be reported on your annual self-assessment tax return. Inheritance tax offers no similar benefit.

VCT managers have complained that upfront relief fell to 30% on 6 April, but other changes have attracted far less attention. VCTs can now invest up to 20 million in an individual company, rather than the previous 10 million; for "knowledge intensive" companies, the limit is 40 million. The maximum size of an eligible firm has also doubled, from 15 million to 30 million.

VCTs can now consider more types of investments, including businesses that are further along. As fast-growing companies raise additional funding, VCTs may also find it easier to join later rounds, which could lower risk and bring returns sooner.