A non-advisory investment service is warning that changes to Venture Capital Trust (VCT) tax relief could leave UK start-ups and scale-ups facing a funding shortfall of approximately £550 million in the first year.
According to Wealth Club, the reduction in VCT tax relief from April, which was announced in the UK Government's November Budget, is likely to cause a sharp fall in VCT investment, with only a small proportion of displaced capital expected to be redirected into the Enterprise Investment Scheme (EIS).
Alex Davies, founder and CEO of Wealth Club, said:
“The Government urgently needs to reconsider these changes. 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.”
The assumption that EIS would naturally replace lost VCT funding is not supported by any evidence and does not reflect investor behaviour, Wealth Club said.
Davies said:
“There is a clear misunderstanding at the heart of this policy. 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 conducted by Wealth Club found that the vast majority of investors plan to reduce or stop VCT investment altogether as a result of the changes. According to the firm, 42% of investors said they would stop investing in VCTs entirely, while a further 44% said they would invest less. Just 13% said they would divert those contributions into EIS.
Davies added:
“This is why the idea that EIS will simply fill the gap left by reduced VCT investment is flawed. The vast majority of investors cutting back on VCTs are not prepared to switch to EIS.”
In the survey responses Wealth Club investors cited clear reasons for not redirecting capital into EIS, Wealth Club said.
Davies continued:
“In our survey, 58.7% said EIS was too risky, 45.8% said it was too illiquid, and 15.1% said minimum investment levels were too high. For context, VCT minimum investments typically range from £3,000 to £6,000, while minimum investments for EIS funds range from £10,000 to £50,000.”
Using the most recent full-year sales data from the 2024/25 tax year, Wealth Club estimates the reduction in VCT investment would result in a gross funding loss of £631.9 million. After accounting for an estimated £82.1 million that may be redirected into EIS, the net shortfall in early-stage funding would be approximately £549.8 million.
Davies said:
“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.
“We are urging Rachel Reeves to urgently reconsider these changes before they come into force in April. Failure to act will create a significant funding gap that risks stalling early-stage business growth in the UK, with knock-on effects for jobs, innovation and economic growth.”
