VENTURE CAPITAL TRUST SHAKE-UP SPARKS FEARS OF FUNDING SHORTFALL FOR UK BUSINESSES
UK start-ups and scale-up businesses could face a funding shortfall of more than half a billion pounds next year following changes to Venture Capital Trust (VCT) tax relief announced in the Budget, according to new analysis from Wealth Club.
The investment platform estimates that reduced incentives for VCT investors will lead to a sharp fall in capital flowing into early-stage UK companies, creating a net funding gap of approximately £550 million in the first year alone. The warning raises concerns that a policy intended to simplify the tax system could have unintended consequences for business growth, innovation and job creation.
VCTs have long played a central role in channelling private capital into small, high-growth UK businesses that struggle to access traditional forms of finance. However, Wealth Club argues that lowering tax relief from April is likely to deter investors, with only a limited proportion of displaced capital expected to move into alternative schemes such as the Enterprise Investment Scheme (EIS).
Alex Davies, Founder and Chief Executive of Wealth Club, said the policy risked undermining the government’s stated ambition to make the UK the best place to start and scale a business.
“The government urgently needs to reconsider these changes,” he said. “Our analysis shows that start-up and scale-up businesses could face a funding shortfall of well over £500 million, as a direct result of changes to VCT tax relief announced in the Budget. If the aim, as was claimed in the Budget, is to make Britain the best place to start and scale a business, this misguided policy risks achieving the opposite.”
A central assumption behind the reforms is that investors will naturally redirect capital from VCTs into EIS. However, Wealth Club says this does not reflect how investors behave in practice. While both schemes support early-stage companies, they serve different investor profiles and risk appetites.
“There is a clear misunderstanding at the heart of this policy,” Davies said. “VCTs and EIS are not competing sources of capital – they are complementary. While some investors use both, the overlap is limited. Among our own clients, only 19% invest in both VCTs and EIS.”
A post-Budget survey of Wealth Club clients suggests that most investors plan to scale back or abandon VCT investment altogether once the changes take effect. According to the survey, 42% intend to stop investing in VCTs entirely, while a further 44% expect to reduce their allocations. Just 13% said they would divert those funds into EIS.
“This is why the idea that EIS will simply fill the gap left by reduced VCT investment is flawed,” Davies said. “The vast majority of investors cutting back on VCTs are not prepared to switch to EIS.”
Respondents cited several barriers to doing so. According to the survey, 58.7% viewed EIS as too risky, 45.8% said it was too illiquid, and 15.1% pointed to high minimum investment levels. By comparison, minimum investments in VCTs typically range from £3,000 to £6,000, while EIS funds often require commitments of £10,000 to £50,000.
Using full-year sales data from the 2024/25 tax year, Wealth Club estimates that the changes could lead to a gross reduction in VCT investment of £631.9 million. After allowing for an estimated £82.1 million that may be redirected into EIS, the resulting net shortfall in early-stage funding would be around £549.8 million.
“This is not an abstract policy debate – it has immediate, real-world consequences for the funding available to thousands of early-stage UK businesses the government says it so wants to support,” Davies said.
He added that the firm is urging the chancellor, Rachel Reeves, to reconsider the measures before they come into force in April, warning that failure to act could slow business growth and weaken the UK’s start-up ecosystem.
