What is a venture capital trust (VCT)?
A venture capital trust is a listed company investing in a portfolio of small, higher-risk trading businesses. Investors receive income tax relief on new shares up to an annual limit, tax-free dividends and tax-free growth, provided the shares are held for five years.
The structural difference from EIS is diversification. A VCT spreads a single subscription across many underlying holdings, which is a materially different risk profile from backing one company.
The tax-free dividend is the main attraction in practice, since mature VCTs typically distribute realised gains as dividends. Relief is only available on newly issued shares — buying in the secondary market gets the tax-free dividends but no income tax relief.
Selling before five years claws the relief back. VCT shares generally trade at a discount to net asset value, so exiting early costs twice. Unlike EIS, VCTs carry no inheritance tax relief at all. They are typically considered by higher earners who have already used their pension annual allowance.