How higher-rate taxpayers could consider using VCTs to reduce income tax in the UK

If you pay tax at a higher rate, finding ways to invest tax-efficiently is getting harder.

Tax-free allowances for dividends and capital gains have been cut, and some pensions could be subject to inheritance tax from April 2027.

That’s why more investors are looking beyond the usual options and considering VCTs. VCTs can offer generous tax benefits, alongside the chance to back some of the UK’s most innovative young companies.

VCTs won’t be right for everyone. They’re for experienced investors with larger portfolios who are comfortable taking more risk and holding investments for the long term..

Here are some of the key tax advantages of VCTs, examples of how they could reduce your tax bill, and a real-life investor’s experience with VCTs through HL.

This isn’t personal advice. If you’re not sure whether VCTs are right for you, it’s best to ask for professional financial advice.

What are VCTs?

VCTs are listed companies that invest in a portfolio of qualifying smaller, younger UK businesses.

Think high-growth startups in tech, biotech, or consumer goods.

The idea is to back them early, support their growth, and generate returns as they scale or exit – of course this is never guaranteed.

To compensate for the higher risk involved with these kinds of companies, the government offers attractive tax reliefs if you choose to invest.

Why higher-rate taxpayers are paying attention

For those paying tax at a higher rate, VCTs can offer attractive tax perks.

When you invest in VCT shares, you can claim back up to 30% of the amount invested as a reduction in your income tax bill. Just make sure you hold the shares for at least five years.

The relief applies only when you buy new shares directly from the VCT during a fundraising period, not when purchasing existing shares on the stock market.

Any dividends you receive from your VCT shares are completely free from income tax, meaning you keep the full amount paid out without it affecting your tax position.

Let’s look at how this could reduce your tax bill in practice.

How VCTs can reduce your tax bill – an example

If you invest £20,000 in a VCT, you could claim up to £6,000 in income tax relief, reducing your effective cost to as little as £14,000. You can claim relief up to the amount of income tax you’re due to pay.

While you need to hold the shares for at least five years to keep the income tax relief, you can normally sell your VCT shares at any time without having to pay capital gains tax on any profit.

Remember, tax rules can change, and benefits depend on your personal situation. Any income you make from your investments can vary and there are no guarantees.

Want to invest in VCTs? – Things to keep in mind

VCTs come with strings attached.

First, they're high-risk investments. There’s a real possibility you could lose money. The companies VCTs invest in are often unproven, illiquid, unlisted, and more likely to fail than their larger peers.

Another point to consider is that while VCT shares are listed on the stock market, they're typically harder to sell than shares in larger companies. Investors should plan to hold for the full five-year period (or longer) to retain the income tax relief.

And unlike traditional funds, many VCTs only raise money at certain times of year, meaning you need to act during an open offer window.

Remember, VCTs can go down in value as well as up more than other types of investment, and your money can be hard to access in the short term. They're long-term investments (five years+), best suited to experienced investors as part of a broader portfolio. Advanced Investments, including VCTs, should only make up, up to 10% of a diversified portfolio.

What types of VCTs are out there?

There’s no one-size-fits-all. Some specialise in certain sectors, like technology or healthcare, while others take a broader approach.

Many of the most established VCTs are generalists, with diversified portfolios of many companies, and track records of returning capital. Past performance is not a guide to the future. .

Do your homework, and don’t be afraid to ask for professional advice – particularly if you’re planning to invest a large sum.

HL investor John, explains his experience investing in VCTs with HL

"I was delighted to find out that I could invest in VCTs with HL. I can see my VCTs alongside my other investments. For me, it’s crucial to have all my investments under one roof. I’m a busy person, and having all my accounts under one log in is not just convenient – it’s vital.

I also appreciated the fact that I could access everything, including my VCTs, through my phone on the HL website. It’s user-friendly, mobile-compatible, and fast.

I found HL’s resources on VCTs to be clear and helpful. The information on their website was particularly useful. It explained the options simply and concisely, including the risks involved. That helped build my confidence when it came to making a decision.

I only opened my first VCT investment about six months ago, so I’m still early in the journey. But so far, the experience has been smooth. I plan to invest in VCTs again this tax year.

I’ve found investing in VCTs through HL to be very straightforward –simple, quick, and effective. Their platform makes it easy to stay on top of things, and I’ve used the information on their website to keep myself informed."