The recent hit to tech equities, which saw Nvidia stocks down to their lowest price since last September and the tech-heavy Nasdaq also at its lowest in 2025, shows the importance of a highly diversified portfolio.
Alternative assets like VCTs have the potential to generate counter-cyclical returns, which is increasingly important in this era of global geopolitical and economic uncertainty.
Domestic considerations are also forcing investors to rethink their strategies. The Autumn Budget introduced some significant changes, including the removal of key tax exemptions, an increase in capital gains tax, and changes to pensions allowances.
In the face of this, VCTs offer a compelling alternative investment option, combining generous tax benefits, such as 30 per cent income tax relief and tax-free dividends, with the potential for higher returns from emerging UK companies.
VCTs over the past decade
Over the past 10 years VCTs have delivered consistently strong returns for investors. For example, research by the British Private Equity & Venture Capital Association (BVCA) has shown that some of the best-performing VCTs have delivered annualised returns of more than 10 per cent in that period. This stands up well against the FTSE 100, which delivered average annualised returns of 6.5 per cent.
Introduced in 1995 as a way to attract private capital to support the growth of dynamic smaller businesses, VCTs are now becoming a vital part of the UK investment landscape. The government recently extended the sunset clause in VCT legislation, ensuring that VCTs are positioned to continue to play a major role in the government’s ambition of fostering innovation and entrepreneurship in the UK.
Supporting British entrepreneurship
VCTs typically target early-stage companies and have been crucial in promoting the growth of fast-evolving sectors including cleantech, software, cybersecurity and healthcare, creating more than 106,000 jobs in such emerging industries since 2016, according to the Venture Capital Trust Association.
VCTs will be important to the future economic success of the UK, where the promotion of new sectors is a key strand of the government’s plan for growth – backing new firms in industries including energy, AI, life sciences, and advanced manufacturing – and the drive to diversify away from traditional strengths in areas such as financial services.
The advantages of early-stage investing
A key advantage of investing in VCTs is that it gives investors access to a portfolio of companies with huge significant potential for growth that are otherwise difficult to access on public markets, and the opportunity to share in the success of younger businesses at the start of the journey.
VCT funding has helped power a number of high-growth companies that have become household names and provided strong investor returns, including Gousto and Zoopla.
While investing in early-stage companies involves a greater level of risk than with traditional asset classes, this risk can be mitigated by investing with experienced investment managers that have the SME and sector expertise to identify the opportunities offering the best potential returns and the ability to build highly diversified portfolios.
By way of illustration, some managers’ VCTs have consistently achieved successful exits from ambitious younger companies, which have delivered significant returns for investors. For example the 2024 exit from Quorum Cyber achieved an overall 8.2x return for the VCTs, having retained a holding in the business following an initial exit in 2022 so that shareholders could participate in the company’s further growth potential.
A highly tax-efficient investment
Beyond the potential for returns, VCTs offer significant tax benefits as part of financial planning and asset allocation strategies. VCT investors can claim initial income tax relief of 30 per cent on investments of up to £200,000 per tax year – an increasingly attractive prospect for high-net-worth individuals and retail investors in combating the impact of additional tax burdens in recent years.
Unlike many other investment vehicles, dividends received from VCTs are tax free, providing a supplementary source of income to help clients achieve their financial and retirement income goals.
With VCT investments typically uncorrelated with public markets, they are an excellent addition to a diversified portfolio strategy, balanced with traditional asset classes to create an investment approach that offers the potential for counter-cyclical returns and is more tax efficient.
While VCTs carry a higher level of risk, their potential for attractive returns through exposure to high-growth emerging companies makes them an excellent complement to traditional equities and fixed income investments.
With established VCTs, such risk can also be mitigated by the expertise of specialist investment managers, which have the ability to construct highly diversified portfolios and a proven track record of adding value and driving growth in dynamic younger companies.
Ewan MacKinnon is a partner at Maven Capital Partners
