Is now a good time to invest in VCTs?

Venture capital trusts (VCTs) are entering their 30s. They’ve stood the test of time, but should you consider investing in VCTs?

As vehicles that invest in private companies, VCTs don’t feature heavily in the top stocks and funds for investors. They are volatile investments, and small businesses often struggle during times of economic instability.

But with interest rates falling, the prospect of a peace deal between Russia and Ukraine on the horizon and increasing investor appetite for private assets, it could be worth considering investing in VCTs.

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“There’s a lot of activity in private markets,” Robert Whitby-Smith, partner of Albion Capital, told a recent media roundtable celebrating 30 years of VCTs. “It's become a very exciting and fast growing asset class. UK enterprise is incredibly strong.

“The UK venture capital ecosystem is now larger than France and Germany combined, and we've got incredible innovation coming out of both our founders – amazing entrepreneurs that founded businesses – and also the universities within the UK.”

VCTs are a form of investment trust deliberately designed to encourage investment into small companies that require external fundraising in order to grow.

For that reason, they come with numerous tax advantages, which we will explore in detail.

“Over the last three decades, VCTs have become a fundamental pillar of the UK’s innovation economy, consistently delivering capital to the most ambitious, high-growth businesses that drive productivity, job creation and technological progress,” says Chris Lewis, chair of the Venture Capital Trust Association.

What are VCTs?

VCTs are a type of investment trust that invests in venture-funded companies. They were introduced in 1995 as a means of incentivising investment into private businesses, which is why they come with tax advantages.

“VCTs are celebrating 30 years of supporting the UK’s most ambitious smaller companies,” said Richard Stone, chief executive of the Association of Investment Companies (AIC). “They have generated thousands of jobs and boosted economic growth across innovative sectors like tech and healthcare.”

They’re a distinctive asset class in that they allow everyday investors access to private companies. These companies don’t usually trade on public stock markets (though some might be listed on Aim); in that instance, you can’t hold them in a stocks and shares ISA.

VCTs, though, make venture-funded businesses accessible to ordinary investors.

The rules on qualifying VCT investments that the funds can make are extremely strict. Usually, VCTs may only invest in businesses worth less than £15 million and with fewer than 250 staff.

These businesses must be less than seven years old and certain sectors of the economy are off-limits, notably most financial services.

The fact that VCTs spread their money across a number of companies goes some way to mitigate the risks of investing in small, early-stage firms like these.

Investors should be under no illusions, though: these are immature and fragile businesses with plenty of potential for failure.

Like all investment trusts, VCTs are themselves listed companies that trade on stock markets. Their entire remit is to invest in assets – in the case of VCTs, these are venture-funded companies.

Investment trusts can (and usually do) trade at a discount to their net asset value (NAV). With private companies being inherently hard to value, this can mean that the value of the shares you buy or own in a VCT can become significantly detached from the valuations of their assets.

What advantages are there to investing in VCTs?

As well as offering access to otherwise inaccessible companies, VCTs offer several tax incentives to investors.

This includes 30% upfront income tax relief on investments into new VCT shares, provided these are held for at least five years. So for every £10,000 you spend, up to £200,000, you can take £3,000 off your income tax calculation.

That only applies to investments in new shares – those issued when the trust is formed or when it raises new capital. VCT shares bought in public markets won’t qualify for income tax relief.

If you sell shares on which you claimed income tax relief within five years, you’ll need to repay whatever tax relief you received.

However, all VCT shares qualify for tax-free dividends, and if you sell any VCT shares at a profit you won’t need to pay capital gains tax (CGT).

“Over time, financial advisers and wealth managers have increasingly recommended VCTs as a tax-efficient investment strategy, expanding their popularity,” said James Hendry, investment director at Gresham House Ventures.

That said, the tax relief on offer should only be part of the equation when determining whether to invest in a VCT, suggests Joshua Gerstler, owner of The Orchard Practice.

“As the investments are in start-up businesses, they are high risk and although the tax incentives are generous, there is a risk of losing all of your money. You should invest in a VCT because you like the investment, not just to save tax,” he says.

Why might now be the time to invest in VCTs?

First of all, it’s important to remember that all investing involves risk. VCTs in particular should be viewed as long-term investments, given the nature of the companies that they invest in.

Smaller, growth-oriented companies are typically risky investments. Many would argue that the current economic climate isn’t conducive to this kind of investing.

Interest rates are relatively high, which increases borrowing costs for smaller companies, and persistent inflation – which could ramp up should president Donald Trump’s tariff regimes disrupt global trade – can deter investment in smaller companies. These firms are often dependent on this external capital for growth.

That’s reflected in the performance of VCTs in the last three years; on average, they have fallen 4.6% over the past year and 16.1% over the past three (to 31 January 2025) according to data from the AIC.

However, periods of adversity often nurture success stories.

Whitby-Smith points out that “if you look at the most successful companies in the world – Apple, Microsoft, Amazon, Nvidia, Uber – often they were founded in difficult economic periods, and that did not hamper their overall success”. He adds that it may even have contributed to it.

Over the long term, VCTs have performed more strongly, gaining 57.7% in the ten years to 31 January and 218.9% in the twenty years to then.

“While broader economic uncertainty persists, the demand for VCTs continues to reflect their role as a stable and established investment vehicle,” says Lewis.

“Investors remain drawn to the combination of growth potential, diversification and government-backed tax incentives, reinforcing VCTs as a key mechanism for funding UK innovation."

Do VCTs trade at a discount?

VCTs currently trade on an average discount rate of 9%. AIM Quoted VCTs trade at 6%.

Discounts aren’t necessarily a particularly useful metric to apply to VCTs, though.

“VCT shares are not normally bought and sold in the secondary market,” explains Nick Britton, research and content director at the AIC.

While “there are sometimes interesting trades to be had buying VCTs in the secondary market, if they are heavily discounted… the problem is that you don’t get the 30% upfront income tax relief.

“For that reason trading of VCTs in the secondary market is a minority sport.”

He adds that individual investors are better-off looking at VCTs’ share buyback schemes, “whereby shares are bought back by the VCT at regular intervals at a set target discount (say 5%)”.

Three top-performing VCTs

Taking a long term view is central to most investing. That’s particularly true when considering investment trusts, and even more so with VCTs.

Given the tax incentives, any investment into a VCT should consider at least a five-year time span, and we’ve extended that out even further, considering VCT performance in the ten years to 31 December 2024. All data is from Morningstar via Wealth Club.

^{Source: Morningstar via Wealth Club}

Remember, past performance is not a reliable indicator of future results.

Both Mobeus Income and Growth (LON:MIX) and British Smaller Companies (LON:BSV) invest in emergent UK businesses – in MIX’s case, unlisted ones in particular.

Albion Enterprise VCT (LON:AAEV) was the first institutional investor in Booking.com and has a focus on B2B software. “What’s different about us is the focus that we’ve chosen and the expertise, the skills and experience we’ve learned within those sectors,” Whitby-Smith told the media roundtable.