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The reduction in Venture Capital Trust (VCT) income tax relief from 30% to 20%, announced in the 2025 Autumn Budget and taking effect from 6 April 2026, has been framed by some as a simple tax grab. However, when viewed through the lens of economic efficiency and modern investment technology, the change is a strategic recalibration that benefits both the UK economy and savvy investors.
By creating a clear hierarchy of incentives, the government is finally rewarding the true risk takers and pushing capital toward the high growth sectors that drive productivity. This structural shift is a signal that the UK is moving toward a more sophisticated, data led venture capital ecosystem.
For decades, the UK investment landscape lacked a logical risk-reward structure. An investor received the same 30% relief for a VCT as they did for an Enterprise Investment Scheme (EIS) investment. This ignored the fact that VCTs are diversified, listed vehicles that act more like private equity funds, whereas EIS involves direct stakes in early stage companies.
The new 20% rate for VCTs restores the risk premium. It acknowledges that VCTs are a more mature, lower risk product. By contrast, the 30% and 50% reliefs for EIS and SEIS are now reserved for those who provide the high octane capital necessary for startups to scale. This ensures that taxpayer money is being used to incentivise the most difficult and impactful stage of company growth.
By reducing the subsidy on the "safer" option, the Treasury effectively encourages capital to flow further down the risk curve. In an era where the UK must compete globally in fields like AI, life sciences, and green energy, this migration of capital is essential. It ensures that the highest levels of support are directed toward the companies that will define the UK’s industrial future rather than those that have already reached a comfortable plateau.
The historical argument for VCTs was that they provided safety through diversification. However, the market has evolved. Leading investment firms now offer managed EIS portfolios that bundle 30 or more companies into a single investment portfolio.
This approach provides VCT style diversification while retaining the superior tax benefits of the EIS scheme, albeit with a higher risk profile. By spreading capital across a large volume of startups, investors can seek to capture the "power law" of venture capital (see our white paper), where a small proportion of the startup population tend to account for the lion’s share of total returns, while the downside on any individual failure is a smaller percentage of the total portfolio, and that is cushioned by loss relief.
For an Individual Financial Adviser (IFA), the ability to offer a client a portfolio of 30+ vetted startups addresses risk management better than picking individual stocks. It turns a "punting" exercise into a legitimate asset class. By using a managed fund model, investors benefit from professional due diligence, ongoing monitoring, and monitored exit strategies, all while maintaining the high income tax relief that VCTs can no longer match.
To understand why this change makes EIS more appealing, we can look at the effective cost of a £100,000 investment for an additional rate (45%) taxpayer after April 2026.
Feature | VCT investment (Post-2026) | Managed EIS portfolio (30+ firms) |
Initial investment | £100,000 | £100,000 |
Upfront income tax relief | £20,000 (20%) | £30,000 (30%) |
Net cost (if successful) | £80,000 | £70,000 |
Loss relief (if a company fails) | None | Up to 45% of the "at risk" capital |
Total net cost (100% loss scenario) | £80,000 | £38,500* |
*For EIS, if an individual company in the portfolio fails, you can offset the loss (net of original relief) against your income tax. On a £100,000 investment where all firms fail, the £70,000 loss yields a further £31,500 in tax relief for a 45% taxpayer, bringing the total net cost down to just £38,500. Tax treatment depends on individual circumstances and may be subject to change.
As the table shows, the "safety net" of the EIS can make it a more cost effective way to take on risk than a VCT. When an investor puts money into a VCT, the 20% relief is all they get; if the trust loses value, there is no further tax shield. With EIS, the government acts as a co-investor, taking a large share of the downside risk through loss relief irrespective of the performance outcome.
From April 2026, the tiers of relief will be clearly defined to support different stages of the economic lifecycle.
Scheme | Income tax relief | Capital gains relief on existing gains | IHT relief | CGT on new gains |
SEIS | 50% | 50% Reinvestment relief (Exemption) | Yes | None |
EIS | 30% | Capital gains deferral relief | Yes | None |
VCT | 20% | None | No | None |
Crucially, the 2025 Budget did not just shift the tax relief; it significantly expanded the capacity for companies to grow within these schemes. The annual investment limit for companies has doubled to £10 million, and the lifetime limit has risen to £24 million. For "Knowledge Intensive Companies" (KICs), these limits are even more generous, reaching £20 million annually and £40 million over a lifetime.
This is a profound change for the UK economy. Historically, many of our most promising firms hit a "funding wall" at the Series B stage. Because they could no longer raise tax efficient capital in the UK, they were often forced to look to US venture capital firms. This frequently resulted in "brain drain," with UK companies moving their headquarters and intellectual property to Silicon Valley.
By raising these limits, the government is allowing UK investors to stay with their winners for longer. It enables a domestic startup to grow into a global leader while remaining a British entity. This keeps high value jobs, tax revenue, and technological sovereignty within the UK.
SyndicateRoom’s Carry Back EIS Fund might be of interest to investors looking to back companies that have reached a critical stage in their growth trajectory whilst seeking tax relief that can be claimed against the 24/25 tax year.
For financial advisers, the shift in VCT relief represents a primary moment to review client portfolios. The era of the VCT as a "default" tax planning tool is coming to an end. Instead, the focus is shifting toward "active" venture capital.
Addressing fiscal drag: With income tax thresholds frozen until 2031, more individuals are being pulled into higher and additional rate tax bands. EIS and SEIS offer the most potent tools available to mitigate this "stealth tax" while simultaneously building an adventurous growth component in a portfolio.
Inheritance tax planning: Unlike VCTs, EIS and SEIS investments qualify for Business Relief (BR) after just two years. This allows investors to pass on their shares free of inheritance tax, provided they are still held at death. In an environment where IHT thresholds are also frozen, this "double benefit" of income tax relief and IHT exemption is invaluable. Read more about inheritance tax planning in our article.
Capturing innovation early: We are in the midst of a technological revolution. By moving capital into SEIS and EIS, investors are getting in on the ground floor of industries like generative AI and biotechnology. These are sectors where the "first mover" advantage is massive, and a diversified portfolio approach is the only sensible way to gain exposure.
The reduction in VCT relief is not a sign of the government cooling on entrepreneurship; it is a sign of a more targeted and ambitious strategy. By making EIS and SEIS the clear winners in the tax relief landscape, the Treasury is pushing British capital to work harder. It is incentivising the use of modern data tools to find the best startups and giving those startups the room to grow into national champions.
The UK economy thrives when its capital is deployed into high growth, high innovation sectors. The 2025 Budget facilitates this by rewarding the brave and the informed. For investors and IFAs, there has never been a better time to pivot away from traditional trusts and toward the transparency, data driven precision, superior potential for sizeable returns and superior tax relief of managed EIS and SEIS portfolios.
The startups of today are the employers and taxpayers of tomorrow. By taking advantage of these schemes now, investors are not just protecting their wealth; they are powering the engine of the British economy for the decade to come.
For those looking to build a diversified, data led portfolio in this new landscape, SyndicateRoom’s Access EIS Fund uses a unique co-investment model to build portfolios of 30+ startups alongside some of the UK's top performing angel investors.
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