VCTs and EISs: How to Mitigate Your Capital Gains Tax Bill
By Boring Money
16 June, 2025
The past few years have seen a raft of changes to Capital Gains Tax (CGT). Successive governments have slowly eaten away at the tax free allowance, and the October Budget raised the rates on non-property assets. Increasingly, investments held outside an ISA or pension are likely to be subject to CGT.
CGT is now payable at 18% for lower rate taxpayers, and 24% for higher rate taxpayers (up from 10% and 20% respectively). This means the rates for residential property and other assets, such as shares or collective funds, are now in line. The capital gains annual allowances are £3,000 per person and £1,500 for trusts.
Previously, people with assets on which they had made a chunky capital gain would often get by on staggering sales across different tax years and using the then-generous annual allowance. They may also transfer assets to a spouse to make the most of their allowance as well.
But today, investors need to take more active measures to mitigate their tax liability. In particular, Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) are a potential option for investors looking to cut their CGT bill.
VCTs and EISs: How they work
Venture Capital Trusts
Venture Capital Trusts (VCTs) can be a useful, if higher risk, option to reduce Capital Gains Tax. They have been designed to funnel capital into small, innovative companies and offer generous tax incentives to do so.
As long as you hold the shares for five years, any gains on VCTs are exempt from CGT when they are sold. Taxpayers can also claim 30% Income Tax relief when they invest up to a maximum of £200,000. For example, if you invested £100,000, you could reduce your liability for the year by £30,000.
While this doesn't directly reduce an investor’s CGT bill, it does bring your overall tax bill lower and could even drop you into a lower tax band.
Enterprise Investment Schemes
Enterprise Investment Schemes (EISs) have a more direct impact on a Capital Gains Tax bill.
These are higher risk, investing in more concentrated portfolios - usually 10-15 holdings versus typically 50+ for a VCT. However, it's possible to reinvest a capital gain on the sale of other assets, and defer the payment of Capital Gains Tax indefinitely. EISs are also free from Inheritance Tax (IHT), just in case that’s where the Chancellor focuses her attention next.
For example, if an asset was sold for £30,000 and cost £10,000, this would result in a gain of £20,000. This £20,000 would need to be reinvested in EIS-qualifying shares in order to defer the gain. The reinvestment needs to be made no earlier than 12 months before, or three years after, the original gain and it also needs to be held for three years.
People will often keep deferring the gain until they hit a year when they don’t have a lot of other income. This could be at retirement, for example, or during a career break.
How to choose the right VCT or EIS
EISs and VCTs are risky. They invest in small companies, whose fortunes can be difficult to predict. Bowmore Financial Planning says there are around 50 different VCT providers on the market with a five-year track record – but not all of them are good investments. “You need to do a lot of reading, research and due diligence before you invest,” it adds.
It says picking a manager with a good track record of paying dividends from their VCT is important. Income from a VCT is tax-free and an important part of their appeal, but also indicates a good manager, capable of picking cash-generative companies. It's also worth remembering that companies held in a VCT or EIS don’t trade on a market, so investors are reliant on dividends, a trade sale or IPO to realise some or all of their investment. An experienced VCT manager will be able to demonstrate how they’ve done this before.
Only choose managers that will buy back your shares if needed: You should always plan to hold your shares in a VCT fund until it reaches the end of its lifespan - which will be at least five years. However, in an emergency you may need to sell them ahead of maturity. Selling them on the secondary market will likely lead to you taking a significant discount in value – so you should choose a manager that has a history of share buybacks.
You should always aim to hold a number of VCTs and EISs, managed by different firms, to ensure that you get a spread of investments. This is the best defence against an individual investment going wrong - it's that basic principle of diversification.
Plus, believe it or not, investing in VCTs is seasonal. The best time to buy is in September to November when funds open for new investment. The best ones go quickly, so it’s worth looking now.
Other ways to minimise CGT
Our article here gives you a range of other options to help mitigate Capital Gains Tax. Overall, the best approach is to look at whether you have a CGT problem, quantify it, and then decide on a long-term strategy to mitigate it - rather than panic-selling a prized second home or ditching your share portfolio!
More and more of us are likely to be paying CGT in future, but there are tools out there that can help. For more suggestions, check out our list of methods for higher rate taxpayers to reduce their tax bill.
