Key Takeaways
- • The UK government cut income tax relief on venture capital trust (VCT) investments from 30% to 20%, yet VCT fundraising surged to the third-highest year on record, according to the author's account in The Telegraph.
- • Permitted company limits were doubled: target companies can now hold up to £30m in gross assets before investment (up from £15m), and qualifying companies can raise up to £10m per year (up from £5m), or £20m for knowledge-intensive companies.
- • Lifetime funding caps for companies doubled to £24m (£40m for knowledge-intensive companies), allowing VCTs to participate in later-stage scale-up rounds.
- • Citing a Chelsea Financial Services study of 29 mainstream VCTs over 10 years, the author reports that funds returned more than 90% of starting NAV through dividends, with 13 of the 29 returning at least 70%.
- • Average net asset returns for VCTs were just under 1% per annum over the last year, and the Octopus Titan trust lost 16% in share price total return over the year and 75% over five years.
Summary
The Telegraph columnist argues that venture capital trusts (VCTs), London-listed funds that have raised at least £8bn over the past decade for early-stage UK businesses, remain a sound option for investors despite a recent cut in tax relief. In its most recent Budget cycle, the government reduced income tax relief on VCT investments from 30% to 20%. The columnist calls this a mistake, citing a saving of only a few hundred million pounds for the Treasury, yet notes the move prompted a surge in investment, making it the third-highest fundraising year for the vehicle.
The reduced relief was partly offset by regulatory changes that loosen investment constraints. Permitted gross assets for target companies doubled to £30m before investment and £35m after, and the annual funding cap from VCTs rose to £10m (£20m for knowledge-intensive companies). Lifetime funding caps doubled to £24m, or £40m for knowledge-intensive companies. The author argues these changes allow VCTs to participate in later-stage scale-up rounds, potentially reducing risk. Other features remain unchanged, including the £200,000 annual individual investment limit and tax-free dividends and capital gains exemptions.
The author emphasises income over share price performance. The AIC comparison tool shows average dividend yields for mainstream VCTs of around 6.2%, with yields of 5% to 7.5% common across the universe. A Chelsea Financial Services study of 10-year returns through 2026 found that 29 mainstream funds returned more than 90% of starting NAV via dividends. British Smaller Companies paid dividends equal to 80% of starting NAV, while Albion Enterprise VCT paid almost 75% and posted a 132.5% total return. Foresight Enterprise VCT recorded the highest single-fund 10-year total return at 148.1%.
The columnist cautions that capital risk remains significant. The average VCT produced net asset returns of just under 1% per annum over the last year, and many funds recorded substantial NAV losses, although Molten VC returned around 6%. The Octopus Titan trust lost 16% in share price total return over the last year and 75% over five years. The author notes that VCT income is valuable only if capital is preserved, which makes up-front tax relief particularly important.
The reduced relief was partly offset by regulatory changes that loosen investment constraints. Permitted gross assets for target companies doubled to £30m before investment and £35m after, and the annual funding cap from VCTs rose to £10m (£20m for knowledge-intensive companies). Lifetime funding caps doubled to £24m, or £40m for knowledge-intensive companies. The author argues these changes allow VCTs to participate in later-stage scale-up rounds, potentially reducing risk. Other features remain unchanged, including the £200,000 annual individual investment limit and tax-free dividends and capital gains exemptions.
The author emphasises income over share price performance. The AIC comparison tool shows average dividend yields for mainstream VCTs of around 6.2%, with yields of 5% to 7.5% common across the universe. A Chelsea Financial Services study of 10-year returns through 2026 found that 29 mainstream funds returned more than 90% of starting NAV via dividends. British Smaller Companies paid dividends equal to 80% of starting NAV, while Albion Enterprise VCT paid almost 75% and posted a 132.5% total return. Foresight Enterprise VCT recorded the highest single-fund 10-year total return at 148.1%.
The columnist cautions that capital risk remains significant. The average VCT produced net asset returns of just under 1% per annum over the last year, and many funds recorded substantial NAV losses, although Molten VC returned around 6%. The Octopus Titan trust lost 16% in share price total return over the last year and 75% over five years. The author notes that VCT income is valuable only if capital is preserved, which makes up-front tax relief particularly important.
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