VCT Tax Reliefs: UK 2026/27 Rates and Rules

Venture Capital Trusts (VCTs) offer a range of tax incentives designed to encourage private investment into smaller, high-growth companies. The UK government has extended the VCT scheme sunset clause to 6 April 2035, ensuring the availability of these tax reliefs for the foreseeable future.

To fully answer what are the VCT (Venture Capital Trust) tax reliefs, practitioners must assess three primary mechanisms: front-end income tax relief on subscriptions, the dividend tax exemption, and the capital gains tax (CGT) exemption on disposal.

Front-End Income Tax Relief (Updated for 2026/27)

Individuals who subscribe for new ordinary shares in a VCT can claim a reduction in their income tax liability.

Effective from 6 April 2026, the Finance Act 2026 amends section 263(2) of the Income Tax Act 2007 (ITA 2007) to reduce the income tax relief rate for VCT investments from 30% to 20%.

“In section 263(2) (form and amount of relief), for “30%” substitute “20%”.”

Key rules and limitations:

• Annual Limit: The maximum annual investment for which an individual can claim VCT income tax relief remains capped at £200,000 per tax year.
• Liability Cap: The tax reduction cannot exceed the individual’s income tax liability for the year, and any excess relief cannot be carried forward to future years or refunded.
• No Carry-Back: VCT income tax relief strictly operates as a ‘front-end’ reduction in the tax year the shares are issued. Unlike the Enterprise Investment Scheme (EIS), the legislation provides no statutory mechanism to carry back VCT relief to a previous tax year.
• Minimum Holding Period: Investors must hold the shares for a minimum of five years.  The shares must carry no present or future preferential rights to dividends or assets on winding up.  If the investor disposes of the shares within this five-year period, HMRC will claw back the initial income tax relief.

Dividend Tax Exemption

Investors receive VCT dividends free from income tax.

Under section 709 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), no liability to income tax arises in respect of a VCT dividend provided the investor acquires the shares for bona fide commercial reasons and within the permitted £200,000 annual limit.

Crucially, this dividend exemption applies to both newly subscribed shares and second-hand VCT shares acquired on the secondary market.

Capital Gains Tax Exemption

A gain accruing to an individual on a qualifying disposal of VCT ordinary shares is entirely exempt from Capital Gains Tax (CGT).

Section 151A of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) dictates that the company must be a VCT both at the time of acquisition and at the time of disposal.  Similar to the dividend exemption, this CGT relief applies to both new and second-hand shares, provided the investor acquired them within the £200,000 annual limit and for commercial purposes.

Investors must note the reciprocal treatment of losses: because gains are exempt from CGT, any loss arising on the disposal of VCT shares is not an allowable loss for CGT purposes.

2026/27 Company-Level Qualification Changes

For a VCT to maintain its qualifying status, the underlying companies it invests in must meet specific thresholds. The Finance Act 2026 introduces several critical adjustments to these limits for the 2026/27 tax year:

• Knowledge-Intensive Companies (KICs): The annual investment limit for KICs increases to £20 million (excluding specified Northern Ireland companies, which have a £10 million limit).  Furthermore, the maximum total risk finance investment a KIC can receive is raised to £40 million.
• Gross Asset Limits: For non-Northern Ireland single companies, the gross asset limits adjust to a maximum of £30 million immediately before the investment and £35 million immediately afterwards.

Summary of VCT Reliefs (2026/27)

Next steps for research: Review the specific criteria for “Knowledge-Intensive Companies” (KICs) under ITA 2007 Part 6 to confirm which target companies qualify for the newly expanded £20 million/£40 million funding thresholds. Evaluate the updated conditions for specified Northern Ireland companies if the VCT portfolio includes businesses registered in that jurisdiction.