How VCTs can help you invest in Britain’s tech start-ups
Venture capital trusts (VCTs) could be an interesting route into the UK’s tech sector. The UK is routinely criticised for its lack of big technology companies capable of competing on the global stage, particularly in the age of AI. But while it’s true that the country lacks household names in the mould of, say, Google or Anthropic, the range and depth of the British technology sector might surprise you.
There are plenty of examples. Quantexa, for example, is a data, analytics and AI software company; founded just ten years ago, it’s now valued at $2.6 billion. Thought Machine, an AI and cloud-computing company focused on the banking sector, is worth a similar amount. ManyPets, an “insurtech” business, has been valued at $2 billion.
All three of these unicorn businesses – start-ups that have achieved billion-dollar valuations – have taken funding from venture capital trusts during their early years. And the next generation of VCT-backed technology companies are snapping at their heels. Examples include Resurrect Bio, using AI for gene editing in agriculture; Spaceflux, whose technologies help governments and commercial operators to track objects in Earth’s increasingly congested orbit; and CreativeX, an AI-enabled content company.
Sign up for MoneyWeek’s free twice-daily newsletter.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
Join more than 165,000 subscribers and keep yourself informed with latest financial news, insights and expert analysis to help you understand what really matters when it comes to your finances.
“VCTs were once regarded as an investment scheme for those focused on reducing their tax bills, but they now represent an opportunity to back some of the UK’s most innovative tech businesses,” says Will Fraser-Allen, managing partner at AlbionVC, manager of the Albion VCTs, which have invested in Quantexa.
Data from the Association of Investment Companies (AIC) reveals that VCTs have made 25 separate investments in British AI businesses over the past three years alone. They’ve also been major investors in technology sub-sectors, including software, fintech, cybersecurity and the internet of things.
It’s a record that would greatly please Ken Clarke, who first launched VCTs in 1994 with the aim of unlocking investment in early-stage and potentially high-growth British companies. The former chancellor remains an advocate for the VCT industry, speaking out recently against changes to the tax reliefs available to investors in these funds. Those changes came into effect from the start of the current tax year. Investments in new VCT shares made since 6 April still qualify for 20% upfront income-tax relief – so the maximum £200,000 contribution allowed would cost you only £160,000 – but this is down from 30% previously.
Alex Davies, the CEO of Wealth Club, a platform specialising in VCT investments, says this reduction is having a significant effect. While fundraising in the 2025-2026 tax year came close to hitting record highs as investors raced to capture the higher upfront relief while it was still available, 2026-2027 has so far been much slower. “The impact has been stark,” says Davies. “The three most established VCTs to launch offers since September have each raised more than 70% less than at the same stage of fundraising last year.”
Davies – like many others in the sector – is disappointed that new chancellor John Healey decided not to reverse the reduction in tax relief, particularly as he undid other changes announced by his predecessor.
“We heard more talk about getting money into startups and scale-ups [in the Budget],” says Davies. “Yet the government has cut relief on VCTs, a proven way of getting substantial amounts of private money into precisely those businesses. Why undermine something that already works? Restoring relief to 30% would have been an obvious place to start.”
VCTs are a tried-and-tested model
Still, VCT fundraising may now pick up and it’s important not to let the perfect become the enemy of the good. “VCTs still offer 20% upfront relief, tax-free dividends and exposure to promising British businesses,” adds Davies. “Less attractive does not mean unattractive, especially in a high-tax environment with very few options to shield your money from it.”
The latter point is important. Tax rates on both dividends and capital gains, also free from tax in a VCT, have risen in recent years while allowances have been reduced. And the value of other tax-efficient investment vehicles has been eroded. The £20,000 individual savings account (ISA) limit, for example, hasn’t been increased since 2017, so is now worth much less in real terms. Private pensions will soon move within the reach of the taxman for inheritance-tax purposes, reducing their attractiveness for many families.
But the case for VCTs should not rest primarily on the tax breaks available. First and foremost, the funds have to make sense in the context of investment potential. Certainly, the technology angle is interesting in the current market environment. “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.” And technology is not the only game in town, with many VCTs investing in a broader range of sectors, or focusing on certain regions of the country. Previous VCT star performers include property website Zoopla, food-delivery service Gousto and the clothing marketplace Depop.
“Ultimately, we’re investing in founders,” says Andrew Wolfson, CEO of VCT manager Pembroke. “We’re trying to identify the best founders with the best business ideas at the earliest stage possible.” That could mean meeting 1,000 companies to make as few as ten investments. “It’s a tried-and-tested model and we’ve got some great businesses in our portfolios, but you do need to accept it takes a long time for them to achieve their potential,” he says. “Anyone who tells you these are, say, three-year investments is talking nonsense.” There will definitely be failures along the way. The fact that the VCT structure provides exposure to a diversified portfolio of early-stage companies provides some protection, with VCT managers often focused on, say, five to ten outperforming holdings that will deliver most of the fund’s returns overall. But individual setbacks can be costly: in one recent example, the collapse of Honest Brew cost one VCT more than £3 million.
In this context, choosing VCTs and VCT managers carefully is critical. This is not an investment discipline where a rising tide floats all boats, with performance disparities between the best and worst funds often very wide. Past performance is one factor to consider, even with the usual caveat that historic data provides no guarantee of what might happen in the future. A manager with multiple years of successful fundraising, investment and exit activity under their belt has at least demonstrated the experience and expertise necessary to make discerning investments; this record also suggests the manager has access to a good network providing a strong flow of potential deals. Equally, where VCT managers are raising new money for an existing fund – rather than launching a new vehicle – you can run the slide rule over its portfolio. How mature are the businesses and how are they performing? How much diversification is there?
Start with the established names in the VCT sector
There are also some technical issues to consider. For example, VCTs often fund dividend payments from realisations of successful investments, providing shareholders with valuable tax-free income. But managers don’t have to pay out the proceeds of exits in full straight away and, since they earn fees based on the value of the fund’s assets, it may not be in their interests to do so. Check what the policy is on this issue.
More broadly on fees, VCTs are expensive compared with traditional funds, with annual charges that may be as high as 3.5%. Some also charge performance-related fees, so check if this is the case and how they are levied. It’s common to charge such fees on the basis of estimated net asset value, for example, even though this is a subjective valuation rather than a realised gain.
One way to cut the cost of investment is to buy VCT shares early in the tax year, when funds often offer “early-bird” discounts. Managers know that people tend to leave decisions about investments with a tax incentive until the final months and weeks of the tax year, so they offer these discounts to try to persuade you to commit earlier. Already this tax year, around 15 managers have begun marketing new funds or new share issues on existing VCTs. It’s important to base your decision about which fund to back – and whether VCTs are right for you at all – on investment factors rather than upfront freebies. But if you are going to invest in a VCT in the 2026-2027 tax year, it makes sense to get the most attractive deal possible – and the most popular funds do sell out.
Finally, bear in mind that VCTs come in different flavours. Investors new to VCTs may be better suited to a more generalist fund – one that invests across multiple sectors and industries, potentially including companies listed on the Aim junior market. “I would always start with the more established, diversified VCTs before considering newer funds,” says Davies.
If you already have several holdings in a fund of this type, it may be worth considering a more specialist fund this year. Octopus Investments, for example, is currently marketing both a generalist fund and two separate vehicles dedicated respectively to software companies and businesses solving big societal challenges. Other managers are offering specialist digital plays, healthcare-focused funds, and VCTs invested primarily in business services.
How the VCT rules work
VCTs must invest at least 80% of their assets in qualifying holdings – typically, that means companies with assets of no more than £30 million, fewer than 250 employees and a trading record no longer than seven years. VCTs build portfolios of these firms – no single investment can exceed 15% of the VCT’s total investments – which helps to spread risk.
Investors get further downside protection from a raft of tax breaks. These are led by 20% upfront income-tax relief on investments in new VCT shares of up to £200,000 each tax year, although you must hold on to these shares for at least five years or repay the relief. Also, both dividends and capital gains from VCT shares are tax-free – you don’t need to declare them on your annual self-assessment tax return. There is no inheritance tax benefit, however.
It’s worth noting that while VCT managers have bemoaned this year’s drop in upfront relief – it was 30% until 6 April – other changes, widely seen as positive, have received less publicity. In particular, VCTs are now allowed to invest up to £20 million in individual companies, compared with only £10 million today – and up to £40 million in “knowledge intensive” companies. And the maximum size of firms eligible for VCT investment, now £30 million, was £15 million previously.
As a result, VCTs now have access to a larger range of potential investments, including more mature businesses – and may find it easier to participate in further rounds as fast-growing companies raise more money. That could help to reduce risk and accelerate returns.
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
