Reducing the 30% income tax relief on venture capital trusts (VCT’s) will lead to a “collapse” in scale-up funding for Britain’s high-growth businesses, according to the Association of Investment Companies (AIC).
As part of the 2025 Budget, the government announced that the VCT and Enterprise Investment Scheme (EIS) company investment limit had been increased to £10m and £20m for knowledge-intensive companies. However, alongside that was a pledge to cut income tax relief on VCTS to 20% from 30%, effective from April 2026.
The government justified this cut to balance the incentives available to EIS investors.
See also: Budget 2025: ‘Fundraising drought’ fears as VCT tax relief cut
However, the AIC argued this was the wrong move and ignored that, according to data released in 2022, tax relief on VCTs was proportionate and reducing it further would hurt fundraising.
Richard Stone, chief executive at the AIC, said: “It’s a classic case of giving with one hand and taking with the other.” He added that “the benefits of higher VCT investment limits will be lost if investors aren’t willing to commit their savings to VCTs.”
On top of this, historical evidence demonstrates that cutting tax relief will lead to a “collapse” in scale-up funding for VCTs, as investors lose a crucial incentive. Stone noted the last time the income tax relief was slashed from 40%, fundraising fell by almost two-thirds and did not recover for the next 16 years.
While the higher investment limits will encourage more growth and drive IPO’s (initial public offerings), the cut to upfront tax relief may undo most of this progress, according to Stone.
Most VCT investors are unlikely to become EIS investors, according to the AIC team. EIS investors are generally more sophisticated, investing in businesses founded by friends or in which they have personal connections.
On top of this, EIS investors generally invest in smaller sums, which is less helpful for small and medium-sized companies which are trying to scale up.
VCT’s, by contrast, do not demand this higher level of knowledge and experience, and in 2023/2024, a greater percentage of VCT investors than EIS investors poured more than £1m into companies. This is “critical in helping SME’s gain scale once they are established,” according to the AIC.
On top of this, income tax relief is essential to mitigate the risks of the asset class, which could deter investors. For example, according to VCTA data, in every year since 2019, at least some VCTs have generated a full or partial loss, with 2024 being a particularly poor year.
Stone said: “The government needs to act now to prevent ambitious British companies losing out.”
