Venture Capital Trusts (VCTs) are specialist investment vehicles – listed companies, managed by professional fund managers, that channel money into portfolios of early-stage, high-growth UK businesses.
Before delving any deeper, it’s important to note that ‘VCTs’ are high-risk products and not suitable for the majority of retail investors. They’re only appropriate for high net worth and/or sophisticated investors, and even then, only for a modest portion of investable assets (as a rule of thumb, I’d say no more than 20% of liquid assets).
The key difference between VCTs and more traditional investment trusts is that VCTs are restricted to only investing in small, typically unlisted, entrepreneurial companies, that are aiming to scale quickly. As one commentator said, “they invest in the Davids, not the Goliaths.”
To qualify, a company must meet strict HMRC criteria at the point of initial investment:
- Assets under £15 million
- Fewer than 250 employees
- Less than 7 years old
- Operating in a ‘qualifying trade’
We’ve previously explored the mechanics of VCT investing – the rules, the risks, and the generous tax perks – in an earlier blog[1]. But we’re returning to the topic this week, prompted by some recent press coverage and a few client queries that followed.
A recent article in the Financial Times has caught attention: ‘Venture Capital Trusts have little reason to celebrate turning 30’ (28th February 2025). It painted a fairly grim picture of VCT returns:
“Over the past five years, the average share price total return for the VCT sector is just 7.7%, vs 51% from the average investment trust. Over the past three years, it's a 16.1% loss vs a 16.6% gain for investment trusts” [underlying source: Association of Investment Companies].
The numbers are eye-catching. And understandably, they’ve raised some eyebrows.
The key question we ask in this week’s blog: is VCT investing still worth considering?
In our view, the answer is yes – but only in certain situations, for certain clients, and with important caveats.
While we don’t disagree with the FT’s data, we do think the analysis misses a key part of the story: tax relief (assuming the investment is held for at least five years and that the current VCT status and tax rules are maintained).
And something financial journalists always ignore when analysing VCT investments, is the potential for repeat tax relief on the same investment by recycling VCTs every five years or so.
That said, VCT performance can vary hugely by manager. In this blog, we break down how theory stacks up against reality and whether VCTs still deserve a place in a modern financial plan.
VCT Investing: In Theory
In theory, VCT investing offers three principle benefits:
1. Growth Potential
VCTs offer exposure to the businesses of tomorrow – ambitious, entrepreneurial companies typically operating at the forefront of innovation. Many are active in fast-evolving sectors such as artificial intelligence, e-commerce, green energy, autonomous vehicles, health tech, and industrial automation.
These are exciting areas with the potential for substantial long-term growth. By investing at an early stage, you’re backing these businesses at a point where valuations are lower and the potential upside is greatest. Of course, early-stage investing comes with greater uncertainty. Many companies may not achieve commercial success – indeed, a proportion are expected to fail.
However, VCTs are structured to manage this risk. They typically spread your investment across a broad portfolio of 30 to 40 (or more) businesses. The goal is that a small number of standout performers – those that go on to deliver returns of 5x or even 10x – will more than offset the losses from those that don’t make it.
That said, it’s important to recognise that investing in early-stage growth companies carries significantly more risk than investing in larger, more established public companies with proven track records and diversified operations.
2. Diversification Beyond Public Markets
Most investors are heavily tilted towards public markets – large companies listed on global stock exchanges. But VCTs offer something different: access to the private side of the economy.
Private equity behaves differently. Outcomes tend to be binary – a business either succeeds or it doesn’t – and success (or failure) is less closely tied to interest rates or global market sentiment. This can offer diversification benefits alongside your listed equity portfolio.
That said, it’s important to be clear: VCTs are high-risk investments in their own right. They invest in early-stage, unproven businesses – so the diversification benefit comes with caveats.
3. Tax Efficiency
Perhaps the most compelling reason to consider VCTs – and the one most overlooked in performance comparisons – is the tax treatment. To encourage investment into this part of the economy, the government offers some attractive reliefs:
- 30% income tax relief on your initial investment (assuming you have sufficient tax liability to offset and that the VCT is held for at least five years)
- Tax-free dividends, which are often the main source of return as portfolio companies are sold
- Tax-free capital gains if your VCT shares rise in value
As an example, say you invest £50,000 into a spread of VCTs. You’ll still pay this upfront, but when you complete your tax return, you’ll typically receive £15,000 (30%) back as a rebate or a reduction in tax owed – reducing your net outlay to £35,000.
VCT Investing: In Reality
On paper, VCTs promise a compelling mix of high-growth potential, diversification, and generous tax incentives. But how have they actually performed?
To explore this, we’ve reviewed the share price performance of the twelve largest VCTs by assets under management, using data from the Association of Investment Companies (AIC[2]), as at 23rd April 2025.
A few points on the methodology:
- Dividends are assumed to be reinvested.
- Performance is measured gross of tax relief and doesn’t factor in initial charges or income tax savings.
- Where a VCT manager runs multiple funds with similar mandates – e.g. Albion, Northern, Mobeus – we’ve used the average return across those funds.
- We’ve kept distinct strategies separate – so for example, Octopus Titan and Octopus Apollo are not combined, given they follow very different investment mandates.
- We’ve also included horizontal reference lines to show average performance across the group.
- The chart below ranks these VCTs by size – from Octopus Titan (currently the UK’s largest VCT) through to Molten Ventures, in twelfth place.
When investing, your capital is at risk. As with any investment, you could lose money. However, the investment risks are much greater with VCTs than with other stock market investments because they invest in small companies, which are much more volatile than their larger counterparts. For this reason, VCTs should be viewed as a long-term investment and are only suitable for experienced investors who have no need for immediate liquidity and can withstand a potential total loss.
What the Data Shows
Performance varies significantly by manager.
For example:
- Foresight VCT and the group of British Smaller Companies VCTs delivered standout five-year returns of +104% and +86% respectively.
- Meanwhile, Pembroke VCT and Octopus Titan VCT returned +18% and -41%, respectively. (The Financial Times article we referenced earlier focused heavily on Octopus Titan’s performance, which, while notable, is clearly an outlier at the lower end—bad news sells!).
The table below shows the average 1, 3 and 5-year performance across the cohort and how this compares with publicly-listed global equities:
As you can see, VCTs have lagged public equities – by c. 25% over five years and 75% over ten. But these figures tell only part of the story.
They exclude a major part of the VCT value proposition: the tax relief.
To illustrate how this works in practice, here’s a simplified case study:
Case Study: Jack & Kate - Repeat VCT Investors
Jack and Kate are high earners and began a disciplined VCT investment strategy in January 2020.
- Each year, they committed £50,000 to VCTs, splitting this evenly between two different managers. This amount equates to around 20% of their annual income surplus. For reference, we would typically suggest investing no more than 20% of total liquid assets in VCTs, given the additional risks involved.
- In year one, they chose the largest and tenth-largest VCTs by assets. In year two, the second and ninth-largest – and so on – steadily building a diversified portfolio of ten VCTs over five years.
- While this manager selection process is a little more rudimentary than the approach we typically recommend, it follows the same core principles: make regular annual contributions and spread your investments across different managers for enhanced diversification.
In our analysis, we’ve factored in:
- 3% initial fees per VCT investment
- 30% income tax relief, assuming they had sufficient tax liability to offset
- Dividends are reinvested
The chart below shows the evolution of Jack and Kate’s VCT portfolio over time, using actual AIC share price data to 23rd April 2025:
For example, in year one, Jack and Kate invested in the Octopus Titan and Foresight VCTs. In year two, they added Albion and ProVen to the mix – and continued in this fashion each year.
Fast forward to today, and their VCT portfolio is worth approximately £287,485.
So how does that compare to what they actually put in?
The chart below compares the gross portfolio value (as above) with their net investment – which includes an assumed 3% initial charge per investment, and crucially, deducts the 30% income tax relief they received each year. This gives us a clearer picture of the real return.
Over the five-year period, their total net investment amounts to £182,500.
That means they’ve seen a net return of +57.5%.
To put that into context, that’s around 10 percentage points higher than the +46.9% average five-year return we cited earlier based purely on share price movements. In other words, the tax relief makes a meaningful difference – especially for repeat investors following a disciplined approach.
There’s a well-worn phrase in investing: don’t let the tax tail wag the investment dog. And we agree – the investment case should always come first.
But equally, it’s misleading to ignore tax altogether – particularly when it’s such a core part of the value proposition. For VCT investors, tax relief isn’t just a bonus feature – it’s a significant driver of overall return.
VCT Recycling: The Overlooked Advantage
In our earlier example, Jack and Kate achieved a net return of +57.5% from their VCT investments – a strong result, though still shy of the +72% delivered by global equities over the same period.
But there’s another lever available to VCT investors that’s rarely highlighted in the financial press: VCT recycling.
This refers to the ability to reinvest the proceeds of a maturing VCT into a new one – unlocking a second round of 30% income tax relief without needing to commit fresh capital. It’s a strategy we’ve covered in detail in a separate blog—click here.
Please note that not all VCTs offer a buyback facility, so liquidity may be limited. Recycling a VCT investment can also involve a period out of the market, which introduces an element of market timing risk. Additionally, for smaller holdings, dealing costs may erode – or even eliminate – the benefit of any associated tax relief. As such, the merits of VCT recycling should be considered on a case-by-case basis.
Assuming VCT recycling is a valid option, here’s how it can work in practice:
Revisiting Jack and Kate’s Case Study
Jack and Kate have now held their original VCT investments – Octopus Titan (£14,775) and Foresight VCT (£51,105) – for five years. That means they’re free to sell without triggering a clawback of the original income tax relief.
They sell the holdings via the VCT managers’ buyback facilities, incurring an assumed 7.5% cost (a combination of discount to NAV and transaction fees). That leaves them with £60,939 to reinvest.
They now put that sum into two new VCTs, potentially topping up existing holdings. Crucially, this qualifies for a second round of 30% income tax relief (subject to them still having sufficient income tax liability to offset).
The result is as follows:
- New portfolio value: £282,544 (slightly reduced due to sale costs)
- New net investment: £166,046 (after deducting tax relief and including initial fees)
That equates to a revised net return of +70.2% – broadly in line with global equities. But with an important distinction: VCT gains and income are entirely tax-free, whereas equivalent returns from unwrapped public market investments would be subject to income and capital gains tax.
So, is VCT investing worth it?
As ever, the answer depends on your circumstances.
VCTs won’t be right for everyone – and we would typically prioritise pension contributions and ISA funding as the first ports of call for any surplus capital.
But for experienced investors with a meaningful income or cash surplus, VCTs can play a valuable supporting role – especially when blended with a broader financial strategy that may include mortgage overpayments, general investment accounts (GIAs), or offshore bonds.
Risks and disadvantages
While the tax benefits are generous, VCTs are high-risk investments and should only be considered by those comfortable with the potential for losses and illiquidity.
Here are the key risks to be aware of:
- High-risk assets: VCTs invest in small, early-stage companies. These are far more volatile – and failure rates are higher – than their large-cap peers.
- Capital at risk: Investments can fall in value, potentially to zero. You may not get back what you invest.
- Liquidity risk: VCT shares are not as easy to buy or sell as mainstream listed shares. Exit may be restricted to manager buyback facilities at a discount to market value.
- Long-term commitment: You must hold VCT shares for at least five years to retain the 30% tax relief. Selling earlier may result in a clawback.
- Tax not guaranteed: Tax rules can and do change. Reliefs depend on your personal circumstances and the VCT maintaining its qualifying status.
As always, if you’d like to explore whether VCTs could be right for you – or how they might sit within your broader financial plan – just let us know. We’d be happy to talk it through.
Happy Thursday!
Kind regards,
George
Important Disclaimer
This blog is for general information only and is intended for retail clients. It does not constitute financial or tax advice, nor is it an offer to buy or sell any specific investment. Since I don’t know your personal financial situation, you should not rely on this content as tailored advice. While we aim to provide accurate and up-to-date information, we cannot guarantee that all details remain correct over time. We are not responsible for any losses resulting from actions taken based on this blog’s content.
