Venture Capital Trusts Explained

Understanding the risks of VCT investments

All investments contain an element of risk, and VCTs are no exception. In fact, because they invest in small, unlisted or AIM-listed companies, VCTs should be considered as high-risk investments.

We’ve outlined some of the risks below, but you should always refer to a specific VCT’s product literature and talk to a professional financial adviser about how the risks could apply to you.

1) Capital at risk

The value of a VCT investment, and any income from it, can fall as well as rise. You may not get back the full amount you invest.

2) Higher risk in smaller companies

VCTs invest in smaller companies that are often not listed on the main market of the London Stock Exchange. Investments in smaller companies can fall or rise in value much more sharply than shares in larger, more established companies. They also have a higher rate of failure.

3) A long-term investment commitment

You should be prepared to hold VCT shares for a minimum of five years. If you decide to sell your shares before then, you will be required to repay to HM Revenue & Customs (HMRC) any upfront income tax relief you’ve claimed. 

4) Limited market for shares

There isn’t an active market for VCT shares in the way there is for shares in bigger listed companies. This means that if you decide to sell your VCT shares, it may take time to find a buyer, or you may have to accept a price lower than the net asset value (NAV) of the VCT. Please refer to the frequently asked questions section for more information on how to sell your shares.

5) Tax rules can change

The VCT tax benefits we’ve described in this guide are correct at the time of going to print. However, rates of tax, tax benefits and tax allowances do change. In addition, the tax benefits available to you through this investment depend on your own personal circumstances. To ensure that VCT money continues to support government policy objectives, HM Treasury can also change the definition of a VCT-qualifying investment in the future. This could impact the nature of new investments a VCT can make over time.

6) VCT’s qualifying status could change

There is no guarantee that VCTs will maintain their VCT status. If VCTs lose their qualifying status, tax advantages will be withdrawn from that point. Additionally, if a VCT loses its status within five years of your initial investment, you will be asked to repay any upfront income tax relief that you have already claimed.

“At Octopus we believe in being totally transparent and honest with our customers. We want them to fully understand how their money is being invested, and the importance of reviewing the risks before making an investment.”

John Averill, Chief Risk Officer, Octopus Investments

Useful statistics

The first VCT was launched in 1995, and the VCT industry has grown remarkably since then. VCTs can offer significant benefits for investors, but they also provide a valuable source of funding for hundreds of UK smaller companies. The statistics show there’s a clear and positive impact for many companies that obtain VCT funding.

¹ Association of Investment Companies (AIC) April 2025.

² The Changing Faces of VCTs report, VCTA 26 February 2025.

³ Venture Capital Trust statistics: up to tax year end 2023/2024, HMRC, May 2025.

Supporting the UK’s success stories

VCTs have played a meaningful role in backing some of the UK’s most recognisable and innovative growth companies at an early stage. Well known businesses such as Zoopla, Secret Escapes, Secret Food Tours, Limitless Travel, and Graze all received early support from VCT funding, helping them scale from ambitious start-ups into household names.

More recently, VCTs have continued to support the next generation of high growth companies across sectors including technology, healthcare and consumer brands. These success stories highlight the ability of VCTs to provide patient capital to promising businesses, while giving investors access to the growth potential of some of the UK’s most dynamic companies.

“For three decades VCTs have helped build the vibrant early- stage ecosystem that exists for entrepreneurs in the UK today.”

Richard Court, Head of VCT and EIS, Octopus Investments

How do VCTs work?

A VCT works in a very similar way to a standard investment trust, one of the oldest forms of collective investment.

A VCT is a listed company in its own right that pools together money from investors and uses it to buy stakes in VCT-qualifying, often privately owned companies. It’s important to note that if you invest in a VCT, you hold shares in the VCT itself, rather than shares in the underlying companies the VCT invests in. If you choose to invest, you will receive a share certificate for the amount you’ve invested. You will also receive a tax certificate that allows you to claim the 20% upfront income tax relief from HM Revenue & Customs (HMRC).

As listed companies, VCT shares are traded on the London Stock Exchange. A VCT must: 

• Publish its own annual report and accounts. 
• Have an independent Board of Directors to look after the interests of shareholders. 
• Hold general meetings for shareholders, including an annual general meeting (AGM). 
• Meet standard corporate governance requirements, just like any public company.

What types of VCT are available?

Each VCT will have its own set of objectives. Some may focus on early stage companies that are yet to make a profit, while some could invest in more established businesses with an element of maturity. It’s therefore important to find out a VCT’s investment strategy before deciding if it’s right for you.

1) Generalist VCTs

Around three quarters of all VCTs belong to this category. Generalist VCTs invest in companies spread across a range of different industries and sectors. The ambition is to create a diversified portfolio of investments which aim to fulfil the mandate of the VCT.

2) AIM VCTs

The Alternative Investment Market (AIM) is the junior market for the London Stock Exchange. It was launched in the same year as VCTs with a similar purpose: to help the growth of UK smaller companies. Unlike other VCT-qualifying companies, AIM-listed companies have a daily market price and have to meet certain regulatory requirements to continue to be listed on AIM. As AIM is a stock exchange, VCT-qualifying shares listed on AIM are easier to buy and sell than shares of privately owned, unlisted companies.

3) Specialist VCTs

As the name implies, specialist VCTs have much more focused investment objectives. They invest in specific industry sectors such as energy, infrastructure or bio-technology. Concentrating on a single sector typically involves more specific investment risk, but it could also offer higher returns if the chosen sector does particularly well.

Which companies can be included in a VCT?

There are a number of rules in place to determine which companies can qualify for VCT funding and be included within the portfolio. HM Treasury sets these rules to make sure that VCTs continue to meet the Government’s policy objectives , with money being directed to those companies most in need of finance to grow.

1) Allowable business activities 

To receive VCT funds, a company must have a permanent establishment in the UK and carry out what HM Revenue & Customs calls a ‘qualifying trade’. Most trades are allowed, but with a number of exceptions that HM Treasury do not believe are in need of additional financing support. Some examples of these currently include land dealing, financial activities, forestry, farming, running hotels and energy generation.

2) Company size 

A company can qualify for VCT investment if it has gross assets of £30 million or less at the time of the investment, or £35 million immediately afterwards. The company must have fewer than 250 full-time employees when the investment is made.

3) Investment amounts

A VCT can invest up to 15% of its money in a single company. Each company is allowed to receive up to £10 million of VCT or other tax-efficient funding in any twelve-month period, with a cap of £24 million over its lifetime.

4) Age of company 

VCTs are expected to invest in companies that are less than seven years old from the date of their first commercial sale. However, there are exceptions for ‘follow-on’ investments and where an established company is looking to raise a significant amount of capital to enter a new product or geographic market.

5) Knowledge-intensive companies 

To support government policy objectives, the funding rules are expanded for companies that have a large proportion of highly-skilled workers or meet certain innovative conditions. These ‘knowledge-intensive companies’ can have up to 500 employees, up to ten years in which to receive their initial VCT funding from their first commercial sale and can receive up to £20 million a year (£40 million lifetime cap).

A note on portfolio management

There are also rules that dictate how a portfolio of VCT investments should be constructed and managed. For example, after a VCT has raised money from investors, it has three years in which to invest it. Also, at least 80% of a VCT’s portfolio must be invested in VCT-qualifying companies. The remainder can be held as cash or invested into cash equivalents – such as money market funds or shares listed on the FTSE.

What are the advantages and disadvantages of Venture Capital Trusts?

There are benefits and risks associated with investing in VCTs.

Advantages of investing in Venture Capital Trusts are:

• It’s an exciting investment in early-stage companies.
• Early-stage companies have the potential to grow faster than bigger companies listed on the main market of the London Stock Exchange.
• Up to 20% income tax relief is available on the amount invested, up to £200,000.
• VCTs can generate additional income through dividends, often targeting a regular tax-free return of 5% per year. They can also pay special dividends if the portfolio has a successful period.
• If a profit is made when selling VCT shares, proceeds aren’t liable for capital gains tax.
• VCTs can help investors diversify their overall investment portfolio. Early-stage companies can follow a different cycle to investments in other parts of the market.
• VCTs help support innovation and growth of the UK economy, by helping smaller companies to grow and create jobs and prosperity across the country.

Disadvantages of investing in Venture Capital Trusts are:

• Investing in early-stage companies is unpredictable and only suitable for investors who are comfortable with high risk.
• Investments could fall in value, potentially to zero, and investors may not get back what they invest.
• Investments in smaller companies can be volatile. Their shares could fall or rise in value more than other shares listed on the main market of the London Stock Exchange. They may also be harder to sell.
• Tax relief isn’t guaranteed. Tax reliefs, rates of tax and tax allowances are based on current legislation. Tax rules could change in the future.
• Tax treatment depends on an investor’s individual circumstances. And tax reliefs depend on a VCT maintaining its qualifying status.
• VCTs are long-term investments. Investors must hold VCT shares for at least five years to benefit from tax relief (if shares are sold before then, any upfront income tax relief that has been claimed must be repaid).

How to invest in a VCT?

You can invest by applying for shares when a VCT is open for new investment (known as a ‘new share offer’). This involves:

• Reading the new share offer prospectus.
• Completing an application form.
• Sending a cheque or electronic payment.

You can invest directly, through an online discount broker or through a financial adviser. But because VCTs are high-risk investments, here at Octopus, we always recommend you talk to a financial adviser before making any investment decision.

VCTs from Octopus

Octopus is the largest provider of VCTs in the market¹. Take a look at the different VCTs we manage.

¹By funds under management. The Association of Investment Companies, April 2024