Cristian Angeloni, Deputy Editor & Special Projects Editor
The Autumn Budget has finally been presented after what felt like one of the longest lead-ups to a major fiscal event.
And although the vast majority of measures were leaked beforehand – also thanks also to the Office for Budget Responsibility, which published its report before Chancellor Rachel Reeves stood at the dispatch box – it still managed to deliver some surprises.
Salary sacrifice changes, cuts to the Cash ISA annual allowance, and extending frozen thresholds had all been speculated and discussed at length ahead of Wednesday (26 November).
But the biggest surprise of all was the way Reeves and the Treasury decided to reform the venture capital trust (VCT) sector.
Investment Week has been reporting all year long on the reforms needed to boost the VCT industry, left at the mercy of inflation, which has eroded more than 40% from its investment power, with investment limits untouched since 2016.
While Reeves' second Budget sought to correct this issue with a doubling of both annual and lifetime limits for ordinary and knowledge intensive companies for both VCTs and enterprise investment schemes (EISs), this came at a very steep cost.
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Deep in the Budget documents, the limit extensions came hand in hand with a 10-percentage point cut to the upfront tax relief for VCTs from 30% to 20%, leaving the sector blindsighted and shocked.
One of the main reasons for investors to pick VCTs is their tax efficiency and because the vehicles allow them to invest in start-ups and early-stage companies - riskier assets which would be otehrwise difficult to access.
The doubled limits were widely welcomed, as they will allow VCTs to "support significantly more businesses and drive innovation, job creation and economic growth across the UK", said Fraser Mackersie, manager of the Unicorn AIM VCT.
But questions arose shortly after the measures were announced, particularly regarding whether the boost of the increased limits will effectively be offset by the cut to the rate of tax relief.
According to data from HMRC and the Association of Investment Companies, when tax relief was raised from 20% to 40% in 2004, VCT fundraising skyrocketed from £70m in the 2003-04 financial year to £520m the following year and £780m in 2005-06.
But then, when in 2006 it was reduced from 40% to 30% - the last time the tax relief had been changed – fundraising dropped by around 65% to £270m in 2006-07 (see chart below).
And now that, from April 2026, the rate will be 20%, VCT professionals are worried a similar drop could be imminent.
"While we welcome the increased VCT investment limits, as a reflection of the evolving capital requirements of high-growth businesses, and in recognition of the vital role that VCTs play in driving home-grown innovation and job creation, this progress risks being overshadowed by the reduction in upfront incentives," said Chris Lewis, chair of the VCT Association.
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Research from HMRC in 2023 highlighted that the biggest driver of investment into VCTs was indeed the ability to get tax relief, which was cited as the "most important factor" by 86% of respondents to the study.
"Reducing tax relief at the point of investment may unintentionally widen the funding gap these reforms aim to close by diminishing the VCT scheme's attractiveness to investors," Lewis added. "This could slow near-term fundraising and limit the flow of capital to innovative UK SMEs."
On top of this, the fact that the changes to the upfront tax relief will only apply to VCTs and not EISs "introduces additional complexity and could distort investor behaviour, weakening the coherence of the early-stage funding ecosystem", the VCTA chair argued.
Seb Wallace, co-founder of Triple Point Ventures and head of the investment and portfolio teams, followed suit, adding that "our hope" is that the changes "do not deter retail investors from backing VCTs, but the impact of these reforms on investor appetite remains to be seen".
This worry already seems to be sparking action, however.
One long-time VCT investor told me that, following the reforms set out by Reeves in her Budget, he "will not be putting in any more money after April 2026", as the balance between risk and reward "just is not there anymore".
Additionally, data from Wealth Club released today (28 November) revealed a 538% rise in VCT inflows to £2m the day after the Budget (27 November), as investors rushed to lock in the higher rate of tax relief ahead of the new financial year.
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A 10 percentage-point reduction to tax relief – arguably the single most attractive feature of VCTs for a large number of investors – seems to be a very steep, if not too steep, trade-off in exchange of higher investment limits, after almost a decade of zero reforms.
At the dispatch box, the chancellor noted that scale-up businesses are responsible for around half of the job creation in the UK.
I just cannot get my head around how such a measure can fit into the growth agenda Reeves and the government have been so vehemently pushing over the last 18 months.
This article was first published as part of the Friday Briefing series, which is available exclusively to Investment Week members each week. Sign up here to receive the Friday Briefing to your inbox each week.
