Venture capital trusts (VCTs) may not be part of your everyday recommendations, but they’re worth a closer look. Now marking their 30th anniversary, VCTs are enjoying renewed interest from both advisers and clients seeking strong post-tax returns and portfolio diversification.
Once seen mainly as a niche, end-of-year tax planning tool for high net worth individuals, VCTs are evolving into a tax-efficient solution with potential appeal to a broader client base – especially as pension and ISA allowances face ongoing restrictions. Demand is high, with nearly £900m invested in VCTs during the 2024/25 tax year – the third-largest annual fundraising since their launch.
So, why bring VCTs into client conversations this year? Here are some compelling reasons.
Reason 1: Target an attractive post-tax outcome
VCT investors can receive 30% upfront income tax relief on investments of up to £200,000 per tax year, provided the shares are held for at least five years.
In terms of returns, VCTs generally aim for a dividend yield of around 5% of net asset value (NAV), paid free of tax.
To match this post-tax income, a non-tax-efficient investment would need to deliver an annual dividend of roughly 8%. When the value of the initial 30% income tax relief is included – spread over the minimum five-year holding period – the equivalent yield for a non-tax-efficient investment rises to around 18% per year.