This article should be of interest to anyone who pays income tax, and particularly to higher and additional-rate taxpayers with a more adventurous investment risk profile.

Following on from my article on EIS and before looking at the benefits, and risks, of Venture Capital Trusts (VCTs), it is worth reminding Scottish residents that their income tax liabilities are noticeably higher than those elsewhere in the UK. For example, a Scottish taxpayer earning £100,000 will pay total income tax of approximately £33,506, around £3,600 more than a taxpayer living in England, Wales or Northern Ireland.

What is a VCT investment?

A VCT investment involves buying shares in a listed company that invests in young, unlisted UK businesses with high growth potential. In return for providing capital to these smaller companies, investors are offered a range of attractive tax incentives.

What are the tax benefits of a VCT?

The principal tax benefits of VCTs are:

  • Income tax relief

  • Tax-free dividends

  • Exemption from Capital Gains Tax (CGT)

These benefits are illustrated in the example below and explained in more detail in Note 1. Unlike Enterprise Investment Scheme (EIS) investments, VCTs do not qualify for Inheritance Tax (IHT) relief.

Example: a VCT investment and its tax benefits (to 5 April 2026)

  • You invest £50,000 into two new VCT issues (£25,000 into each).

  • You are resident in Scotland.

  • Your annual taxable income is £200,000.

  • You reclaim 30% income tax relief, amounting to £15,000, reducing the net cost of your investment to £35,000.

  • You pay Scottish income tax at 48% on non-dividend income above £125,140. Dividend income, however, is taxed at UK-wide dividend tax rates of 39.35% for additional-rate taxpayers.

  • Assuming a 5% annual yield, the £2,500 dividend received from your VCT investment is completely free of income tax. Had this dividend been received outside a VCT, tax of 39.35% would apply, reducing the net dividend from £2,500 to approximately £1,516.

  • If the VCT shares increase in value and are sold, no Capital Gains Tax applies — potentially saving up to 20% CGT for higher and additional-rate taxpayers.

  • After 5 years the VCT can be sold and rolled into a new VCT and allowed to claim the income tax relief again.

Important: If VCT shares are sold within five years of purchase, the income tax relief originally claimed will be clawed back.

Reduction in VCT tax relief from 6 April 2026

The November 2025 Budget announced a significant change to VCT tax relief. For VCT investments made after 5 April 2026, income tax relief will be reduced from 30% to 20%.

Using the example above, a £50,000 investment made after this date would generate tax relief of £10,000, rather than £15,000.

If you are considering a VCT investment and wish to benefit from the higher 30% relief — remembering that VCTs are higher-risk investments — you should act before 6 April 2026. Please feel free to contact us at Hamilton on 0131 315 4888

Additional information you should know

  • VCTs were introduced in 1995 to help smaller unquoted UK companies raise finance.

  • Investors subscribe for shares in a VCT, which then invests in qualifying trading companies to support their growth and development.

  • VCTs must be listed on a recognised UK stock exchange, typically the Alternative Investment Market (AIM).

  • Because VCTs invest in small, early-stage businesses, they are considered higher-risk investments, and investors should be prepared for the possibility of capital loss.

  • Risk is commonly managed by spreading investments across multiple VCT providers.

  • Income tax relief is claimed through a Self Assessment tax return, supported by a VCT certificate.

  • If VCT shares are disposed of within five years, income tax relief is clawed back, making VCTs more suitable for longer-term investors.

  • With income tax rates at historically high levels, VCTs may continue to attract interest despite the forthcoming reduction in tax relief.

  • Minimum investments tend to be much smaller at c£3000.

A client’s experience

“As a reasonably successful practising barrister, my principal objective in investing was to achieve capital growth rather than income, and to do so through investments that did not require too much continuous monitoring. I was also keen to invest tax-efficiently.

Around 20 years ago I became interested in VCTs. Although regarded as fairly high-risk, they offered the prospect of capital growth alongside a reasonable tax-free income.

With the help of my financial adviser, I invested around £30,000 per year across a number of VCTs. After several years, I had built a portfolio of approximately £200,000, diversified across many holdings.

My current holding is worth about £150,000 and over the past five years has generated annual tax-free income of around £15,000 to £20,000. While capital growth has been modest, the steady tax-free income has proved extremely useful.

For a top-rate taxpayer, I regard this as a satisfactory outcome and consider my investment in VCTs to have been very worthwhile.”

Note 1: Key tax advantages of VCTs

  • Income tax relief of 30% (reducing to 20% for investments made from 6 April 2026) on up to £200,000 of VCT subscriptions per tax year.

  • Tax relief is claimed through Self Assessment and can only offset tax actually due.

  • Dividends paid by VCTs are completely free of income tax.

  • No Capital Gains Tax is payable on disposal of VCT shares.

  • VCTs do not pay corporation tax on gains within the fund, which can enhance the level of tax-free dividends.

  • While dividends are not guaranteed, many VCTs aim to pay regular dividends, typically in the range of 4% to 8%.

Andrew Hamilton CTA, DipPFS
February 2026