Northern VCTs launch £30m fundraise, opening up regional opportunities to back startups
Jonathan Moyes, head of investment research, Wealth Club: “There’s a fresh chance to back startups and scaleups across the UK and get a tax break in the process. Investing in a VCT is a bit like having a seat at the table with the angel investors, but instead of picking one start-up yourself, you’re spreading your investment across a portfolio of young, ambitious companies. The Northern VCTs have launched an offer for up to £30 million to funnel into supporting new and existing portfolio companies. Northern VCTs manager Mercia has 11 offices spread across the UK, supported by a 49-strong venture team. This extensive regional presence helps generate investment opportunities beyond the traditional venture capital hotspots and provides local support to portfolio companies as they grow.
The Northern VCTs have continued to demonstrate their ability to realise investments, generating £198m of exit proceeds from 39 exits in the five years to March 2026. Particularly notable was the sale of Idox, a software and IT management solutions provider to the public sector, which delivered a 6.9x return for the VCTs after the business was acquired for £339.5m by private equity.
It is no secret that the higher interest rate and inflation environment of recent years has created headwinds for venture capital trusts, and the Northern VCTs have not been immune, with returns more subdued over the past five years. However, as an established generalist investor, the VCTs’ portfolio spans around 60 companies and is diversified across a range of sectors and stages of development, which could make them appealing to experienced investors who are able to take a longer-term view and build a diversified VCT portfolio.”
Why VCTs are worth investing in
Most investors are initially attracted to VCTs for the tax breaks, and they are generous. Investors can get up to 20% back in income tax relief up front, any dividends paid by the VCT are tax-free, and growth is free of capital gains tax too.
However, VCTs are more than just a tax planning tool. They’re probably the best way for UK investors to access fast-growing smaller companies. Revenue growth from VCT investees far outstrips what you see in main market listed companies, and the result has been some attractive returns for investors over the longer term.
Exposure to high-growth, smaller companies also has the potential to diversify a conventional portfolio. Long-term performance is often only loosely correlated with the wider economy. Highly disruptive businesses grow by taking market share from incumbents rather than relying on market growth.
The rules governing VCTs mean they’re also an excellent way to back smaller businesses. It’s their role providing support to the next generation of UK start-ups, driving innovation and creating jobs, that earns them the tax relief from the government – and many investors feel that this is something they wish to support too.
Who should consider them?
VCTs are higher risk, and while they’re listed on the stock market, in order to qualify for tax relief investors must hold the shares for at least five years before selling – making them inherently long-term investments. Unlike most conventional funds and shares, the minimum amount you can invest is comparatively high – often £3,000 or more. All of this means they are best suited to wealthier or more sophisticated investors.
VCTs are popular with two groups in particular
The first is higher earners or wealthier investors who are limited in what they can put into more mainstream tax wrappers. Those who already use the full £20,000 ISA allowance or whose pension contributions are tapered due to the amount they earn. The £200,000 a year annual VCT allowance is generous and can save higher earners up to £40,000 in upfront income tax.
The second group is those in, or near, retirement who use VCTs’ tax-free dividends to supplement income from other sources. Because they’re higher risk, VCTs shouldn’t be considered a replacement for a pension, but they can help to top up income from more conventional sources.
Some other tips?
- Seek diversification – VCTs are high risk, so spread your investments over multiple managers. Fortunately there’s lots of choice in the market, from trusts with expertise in particular sectors, like Pembroke VCT, to broad generalist funds like the Albion VCTs.
- Reinvest and recycle – Get an additional 20% initial income tax relief by reinvesting those tax-free dividends. You can also recycle the proceeds from selling the shares, once they’ve been held for five years, into a new VCT.
- Be aware of discounts – VCT shares trade on the stock market, but often at a discount to the underlying value of the fund’s investments. That shouldn’t be a problem for long-term investors, who will receive the majority of their return through tax-free dividends as well as underlying growth. However, it’s something to be aware of and is another reason these should be treated as long-term investments.
- Capacity limits – If you see something you like, it can pay to act quickly. VCTs have limited capacity each year, and popular offers can quickly reach capacity and close to new investors. Some VCT managers also offer lower fees to investors who invest soon after an offer opens.