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Venture Capital Schemes: Is the tax relief worth the investment risk?

28 Jul 26 Emily Malone

No one likes paying more tax than they need to.

So when something offers generous tax relief, it’s understandable that it grabs attention.

That’s often what happens with Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS). The reliefs can look attractive, especially if you’ve already used more familiar allowances and you’re looking for other ways to invest tax-efficiently.

But these aren’t simple tax wrappers. They’re higher-risk investments in smaller companies. They can be harder to value, harder to sell, and much less predictable than people sometimes expect. So while the tax relief can be meaningful, it should never be the only reason for investing.

The better question is whether the risk, illiquidity and complexity feel proportionate in the context of your wider financial plan. That’s usually where the real decision sits.

What are VCTs and EIS investments?

Both Venture Capital Trusts and the Enterprise Investment Scheme are designed to encourage investment into smaller UK companies by offering tax incentives to investors.

A VCT is a listed investment company that pools investors’ money and invests in qualifying smaller businesses. HMRC’s guidance on tax relief for investors using venture capital schemes explains how these schemes work and who can claim the relief.

An EIS investment is more direct. Instead of investing through a pooled structure, you invest in shares issued by an individual qualifying company. That can mean more concentration risk, less diversification, and a more specialist type of investment overall.

Both can offer valuable tax reliefs.

Both also involve materially more risk than mainstream long-term investing.

What tax relief do VCTs and EIS offer?

This is usually the part people look at first, and understandably so.

EIS tax relief

Under current HMRC rules, EIS offers:

30% income tax relief
investment of up to £1 million a tax year, rising to £2 million if anything above £1 million is invested in knowledge-intensive companies
the option in some cases to treat shares as subscribed for in the previous tax year
Capital Gains Tax deferral relief
CGT-free growth on disposal, provided the conditions are met
loss relief in some circumstances if the investment performs badly or fails

HMRC sets this out in its EIS Income Tax relief helpsheet (HS341) and its Capital Gains Tax and EIS helpsheet (HS297).

To keep the income tax relief, the shares generally need to be held for at least three years.

VCT tax relief

For VCTs, the position is a little different.

From 6 April 2026, the VCT income tax relief rate was reduced from 30% to 20%. Investors can still invest up to £200,000 a tax year, and qualifying dividends are free of income tax. Gains on disposal can also be free of Capital Gains Tax. The holding period to keep the relief is generally five years. The updated position is set out in the government’s published EIS and VCT changes and the VCT investor guidance.

So yes, the tax benefits can be attractive. But they’re only one part of the story.

Is the tax relief worth the investment risk?

Sometimes, yes. But not because the relief makes the risk disappear. That’s usually the most important thing to hold onto.

Tax relief can improve the after-tax outcome. It can soften some of the downside. It can make a higher-risk allocation more acceptable for the right investor. But it doesn’t turn a speculative investment into a low-risk one.

You’re still investing in smaller, less established companies. You’re still taking liquidity risk. You’re still accepting that returns may be uneven, uncertain, or disappointing.

So rather than asking whether the relief is generous, it’s usually better to ask:

Would this still feel like a sensible risk to take with part of my money if the tax relief were less generous than it is?

That question tends to bring things back into perspective.

Where these schemes can make sense

There are situations where VCTs and EIS can play a useful role.

When you’ve already used more mainstream allowances well

For some investors, these schemes become relevant only after the more obvious planning opportunities have already been used.

That might mean making good use of pensions. It might mean using ISA allowances fully. It might mean getting the broader foundations in place before stepping into something more specialist.

We touch on that wider allowances picture in our blog post Tax year end planning checklist for the 2025/26 tax year.

When you can genuinely tolerate the risk

This is a very important consideration.

These schemes are usually more appropriate for people who can afford to take risk with a relatively small part of their wealth, not people who need this money to behave predictably.

That means being comfortable with the possibility of:

Losing capital
Waiting longer than expected for an exit
Patchy or delayed returns
Difficulty valuing what you hold
A longer holding period than you’d ideally like

If that feels manageable within your wider plan, that’s one thing.

If it feels uncomfortable, that matters too.

When the tax relief supports the decision rather than drives it

This is usually the healthiest use case.

The strongest VCT or EIS decisions tend to be the ones where the investment already has a place in the broader plan, and the tax relief simply improves the outcome.

The weaker decisions are often the ones driven mainly by a desire to reduce a tax bill.

That doesn’t make the motive irrational. But it can lead people into risk they didn’t really want, disguised as efficiency.

Where they often don’t make sense

These schemes aren’t for everyone.

And in many cases, that’s not a problem. It’s just clarity.

When liquidity matters

EIS shares aren’t designed for easy exits, and while VCTs are listed, that doesn’t necessarily mean they’ll behave like liquid mainstream investments in practice.

You also need to keep the shares for a minimum period if you want to retain the tax relief. For EIS, that’s generally three years. For VCTs, it’s generally five. HMRC outlines this in its venture capital schemes guidance for investors.

So if there’s a reasonable chance you’ll want this money back in the near term, then these types of investments may not be the best ones for you.

When the tax tail is wagging the dog

It’s easy to focus on the relief and underweight the risk.

But a generous tax break on the wrong investment is still the wrong investment.

Tax relief can improve the maths, but it shouldn’t be the reason you choose an investment that doesn’t suit your circumstances.

When the better answer sits elsewhere

Sometimes people start looking at VCTs and EIS because they want to do something about tax. But the more appropriate answer may be simpler.

That might mean using pensions more effectively. It might mean looking again at Capital Gains Tax planning. It might mean improving asset location or making fuller use of more familiar wrappers first.

We’ve written about some of those wider tax-planning decisions in Making pension contributions to reduce capital gains tax and How To Lower Your Capital Gains Tax Bill.

VCT vs EIS: what’s the practical difference?

At a practical level, VCTs often feel more accessible.

That’s partly because they offer a pooled structure rather than direct exposure to a single company, and partly because the tax-free dividends can appeal to investors who like the idea of tax-efficient income. HMRC confirms in its investor guidance that qualifying VCT dividends are free of income tax.

EIS tends to be more specialised.

The tax relief can be broader overall, especially once you factor in CGT deferral and possible loss relief, but the underlying company risk is often more concentrated and the investment process can feel less straightforward.

So in broad terms:

VCTs may feel more structured, more diversified and more income-focused
EIS may offer wider tax reliefs, but often with more concentration risk and complexity

Neither is automatically better.

It depends what role, if any, they’re meant to play in the wider plan.

A simple example

Let’s say someone has already used much of their ISA allowance, is contributing meaningfully to pensions, and is facing a sizeable income tax bill this year.

A VCT or EIS investment might immediately look appealing because of the upfront relief.

That may be perfectly reasonable.

But the next question matters more: what happens if this underperforms, proves hard to sell, or loses value altogether?

If the answer is, “That would be frustrating, but manageable within the wider plan,” then it may be worth exploring further.

If the answer is, “That would affect other goals or put pressure on my financial security,” that usually tells you something more important than the tax relief does.

That’s often where good advice adds the most value. It puts the relief back in context.

Thinking about VCTs or EIS?

We can help you weigh up the tax relief, the investment risk and how these schemes would sit alongside the rest of your financial plan, so the decision feels considered rather than reactive.

What investors should think about before using them

Before investing in either scheme, it’s worth asking:

Am I doing this because it fits my plan, or because I dislike the tax bill?
How much of my investable wealth would this represent?
How comfortable am I with losing some or all of this capital?
Do I understand the holding period and liquidity constraints?
Am I already making good use of simpler tax wrappers?
Is this still sensible if the tax rules change later?

That last point matters too.

Tax rules do change. The recent reduction in VCT income tax relief is a useful reminder of that.

So while the current reliefs are generous, they shouldn’t be treated as fixed forever.

Where we add value

VCTs and EIS can be useful tools.

But they’re specialist tools, and they work best when they’re used deliberately.

Our role is to help you work out whether they belong in your plan at all, and, if they do, how much weight they should carry.

That may mean deciding they’re appropriate for a small part of your wealth. It may mean using them only after more mainstream planning opportunities have already been used well. Or it may mean deciding they’re not worth the complexity or risk in your situation.

Sometimes the most valuable part of the conversation isn’t whether the tax relief is attractive.

It’s whether the investment risk is genuinely acceptable.

The bottom line

VCTs and EIS can offer meaningful tax benefits, but they only make sense when the investment risk, illiquidity and complexity are acceptable in the context of your wider financial plan.

EIS currently offers 30% income tax relief, CGT deferral and potential loss relief. VCTs offer 20% income tax relief from 6 April 2026, tax-free dividends and tax-free gains on disposal if the conditions are met. Both require minimum holding periods, and both involve investment in smaller, higher-risk companies.

So the tax relief may be worth it.

But only if the risk is worth taking in the first place.

FAQs

Is the tax relief of VCTs and EIS worth the investment risk?

VCTs and EIS can offer valuable tax relief, but they’re higher-risk investments in smaller companies, and they’re not right for everyone. They tend to make more sense when you’ve already used mainstream allowances well, can tolerate the risk, and are using the tax relief to support a sensible investment decision rather than drive it.

Are VCTs and EIS high-risk investments?

Yes, generally. Both schemes are designed to channel money into smaller qualifying companies, which makes them higher risk than mainstream diversified investments. HMRC’s guidance for investors makes clear they sit in a different risk category from more conventional planning wrappers.

What is the tax relief on EIS?

Under current HMRC rules, EIS offers 30% income tax relief on qualifying investments, subject to the annual limits and conditions. There can also be CGT deferral relief, CGT-free growth on disposal if the rules are met, and loss relief in some cases. The detail is set out in HMRC’s EIS Income Tax relief helpsheet (HS341).

What is the tax relief on VCTs?

From 6 April 2026, the VCT income tax relief rate is 20%, with a maximum qualifying subscription of £200,000 a tax year. Dividends are free of income tax and qualifying gains on disposal are exempt from CGT. The updated position is set out in the government’s EIS and VCT changes.

How long do you need to hold VCT or EIS shares?

To keep the relief, EIS shares generally need to be held for at least three years, while VCT shares generally need to be held for at least five years. HMRC covers this in its venture capital schemes guidance for investors.

Is the tax relief enough to offset the investment risk?

Not on its own. Tax relief can improve the after-tax outcome and soften some of the downside, but it doesn’t remove the risk of capital loss, poor performance or illiquidity.

Sources

Articles on this website are offered only for general information and educational purposes. They are not offered as, and do not constitute, financial advice. You should not act or rely on any information contained in this website without first seeking advice from a professional.

Capital is at risk; investments and the income from them can fall as well as rise and investors may not get back the amounts originally invested.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

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Date written: 29/06/2026

Approved by Evolution Wealth Network Ltd on 02/07/2026.

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