A venture capital trust (VCT) is a listed investment company approved by HMRC that invests in small, growing unlisted businesses. An individual aged 18 or over who subscribes for new VCT shares gets an income tax reduction of 20% of the amount invested for shares issued from 6 April 2026 (30% before that), on up to £200,000 a tax year, provided the shares are kept for five years. Dividends and gains on VCT shares within the £200,000 annual limit are also free of tax.

What is a venture capital trust?

The rules are in Part 6 of the Income Tax Act 2007. A VCT is a company that HMRC has approved under section 274, which sets conditions including:

  • its ordinary shares are admitted to trading on a regulated market;
  • its income comes wholly or mainly from shares or securities;
  • it retains no more than 15% of that income;
  • no single holding (other than in another VCT) is worth more than 15% of its investments;
  • most of its investments are qualifying holdings in small unlisted trading companies.

The investor does not have to check the underlying companies; that is the VCT’s job. The investor’s own conditions are about who subscribes, how much, and how long they hold. Because the fund spreads money across many companies, a VCT is a different proposition from a direct investment under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, and only the VCT offers tax free dividends.

How much income tax relief do you get?

Section 263 gives a tax reduction equal to 20% of the amount subscribed. The Finance Act 2026 cut the rate from 30% with effect from 6 April 2026, and HMRC’s Venture Capital Schemes Manual at VCM51030 confirms 20% for investments made on or after that date. The relief is the same 20% whatever the investor’s marginal rate.

The relief is a reduction in the income tax bill, not a deduction from income, and it is limited to the amount that reduces the investor’s income tax liability for the year to nil. Any excess is lost: it cannot be carried forward or back. Section 262 caps the amount that can attract relief at £200,000 in a tax year.

To be eligible under section 261, the investor must:

  • subscribe for new shares on their own behalf, issued by the VCT to raise money;
  • be at least 18 when the shares are issued;
  • subscribe for genuine commercial reasons and not as part of tax avoidance arrangements.

Shares must currently be issued before 6 April 2035 to qualify, although the Treasury can move that date. Shares bought from another investor on the stock market get no income tax relief, though they can still benefit from the dividend and gains exemptions.

How do you claim the relief?

Relief is given for the tax year in which the VCT issues the shares, which is not always the year the money was paid. It can be claimed on the Self Assessment return or by a separate claim stating the amount and the tax year. HMRC’s guidance says you do not have to wait for the return: you can ask for your tax code to be adjusted or for a repayment, and Self Assessment taxpayers can reduce payments on account. Claims can be made up to four years after the end of the tax year of investment. The VCT normally issues an income tax relief certificate, which HMRC may ask to see if it doubts a claim.

What is the five year minimum holding period?

Section 266 claws back relief if the investor disposes of the shares within five years of their issue. The effect depends on the type of disposal:

  • Not at arm’s length (for example a gift to a child): all the relief on those shares is withdrawn.
  • At arm’s length (a normal sale): the relief is reduced by a set percentage of the sale proceeds in section 266(4), or withdrawn entirely if the relief is no more than that amount. A sale at or above the subscription price therefore loses all the relief; a sale at a heavy loss may leave some in place.

Shares acquired earlier are treated as sold first. Under section 267, a transfer to a spouse or civil partner living with the investor does not trigger a clawback, but the receiving spouse steps into the investor’s shoes and any later disposal within the period is assessed on them. If HMRC withdraws the company’s VCT approval, section 268 treats investors as having disposed of their relieved shares otherwise than at arm’s length, so all relief on shares held within the five years is withdrawn.

What is a linked sale?

Section 264A stops investors selling existing VCT shares and reinvesting the proceeds into the same VCT to obtain fresh relief. If the sale and the new subscription are within six months of each other, in either order, or one is conditional on the other, the new subscription is treated as reduced by the sale proceeds. The rule also covers a VCT that has merged with or succeeded the one sold.

Are VCT dividends really tax free?

Yes, within limits. Section 709 of the Income Tax (Trading and Other Income) Act 2005 exempts dividends on ordinary shares in a VCT if the shareholder is at least 18, the shares were acquired for genuine commercial reasons, and the market value of all VCT shares the individual acquired in that tax year did not exceed £200,000 (or the shares are treated as acquired within that limit). The exemption covers shares bought on the market as well as new subscriptions, and it does not use up the dividend allowance. The holding period is not a condition for the dividend exemption, so dividends received before year five are still exempt even if income tax relief is later clawed back.

How are gains and losses on VCT shares treated?

Section 151A of the Taxation of Chargeable Gains Act 1992 says a gain on a qualifying disposal of VCT shares is not a chargeable gain, and a loss is not an allowable loss. The disposal must be by an individual of at least 18, of shares not acquired above the £200,000 permitted maximum, which the company was a VCT both when they were bought and when they are sold. Shares above the annual limit are treated as sold first and are taxed under the normal capital gains tax rules. Because losses are not allowable, a fall in value of a VCT gives no relief against other gains.

How does it work in practice?

Illustration only. Priya subscribes £50,000 for new VCT shares issued in June 2026. Her income tax liability for 2026 to 2027 before the relief is £30,000.

Item Amount
Relief at 20% of £50,000 £10,000
Income tax liability after relief £20,000
Dividends of £2,500 a year Exempt

If her liability had been only £6,000, her relief would have been capped at £6,000 and the other £4,000 lost. If she sells the shares in 2028 for £50,000, the sale is inside five years and at or above cost, so the whole £10,000 is withdrawn. If she sells in July 2031, after the fifth anniversary of issue, she keeps the relief and any gain is exempt.

What mistakes do investors make?

  • Buying on the market and claiming relief. Only new shares subscribed for qualify for the 20% reduction.
  • Investing more than the tax bill can absorb. Unused relief is lost, so check the expected liability for the year of issue.
  • Claiming in the wrong year. Relief belongs to the tax year the shares are issued.
  • Selling and reinvesting within six months. The linked sale rule reduces the new relief.
  • Going over £200,000 in a year. The excess gets no income tax relief, no dividend exemption and no gains exemption.
  • Expecting loss relief. VCT losses are not allowable losses.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.