VCT and Inheritance Tax: Why Venture Capital Trust Shares Do Not Qualify for BPR
VCT shares are listed on the London Stock Exchange main market — they are quoted securities and do not qualify for Business Property Relief under s105 IHTA 1984. Despite their considerable income tax and CGT advantages, VCTs are not an IHT planning tool. EIS shares in unquoted companies are the IHT-efficient alternative.
VCT vs EIS vs AIM: Tax Benefits Compared
| Tax benefit | VCT | EIS | AIM shares |
|---|---|---|---|
| Income tax relief on subscription | 30% (up to £200,000/year) | 30% (up to £1m/year, £2m KIC) | None |
| Tax-free dividends | Yes | N/A (most EIS companies pay no dividends) | No — taxed as normal income |
| CGT-free growth on disposal | Yes (if held 5 years) | Yes (if held 3 years from share issue) | No — CGT applies |
| IHT Business Property Relief | No — quoted securities | 100% BPR after 2 years | 50% BPR from April 2026 (was 100%) |
| CGT deferral on reinvestment | No | Yes — gains deferred into EIS | No |
Why EIS Qualifies for BPR and VCT Does Not
Section 105(1)(b) IHTA 1984 provides 100% Business Property Relief for shares in unquoted companies — companies not listed on a recognised stock exchange. The LSE main market is a recognised stock exchange, so shares listed there are quoted and outside BPR.
When you invest in an EIS company, you directly hold shares in a specific private (unquoted) trading company. After two years those shares attract 100% BPR.
When you invest in a VCT, you hold shares in the Venture Capital Trust — a company listed on the LSE. The VCT's portfolio may consist entirely of unquoted investments, but the investor does not hold those investments directly. The investor holds quoted shares in the VCT fund. BPR does not “look through” the quoted wrapper to the underlying unquoted portfolio.
AIM shares occupy a middle position: AIM is not a “recognised stock exchange” for BPR purposes, so AIM shares are treated as unquoted. They attract 50% BPR from April 2026 (reduced from 100% by the October 2024 Budget).
Frequently Asked Questions
Do VCT shares qualify for Business Property Relief and reduce IHT?
No. Venture Capital Trust shares are listed on the main market of the London Stock Exchange. Business Property Relief under s105 IHTA 1984 is available for shares in unquoted companies — companies not listed on a recognised stock exchange. The LSE main market is a recognised stock exchange, so VCT shares are quoted securities that fall entirely outside s105. They do not qualify for BPR and are included in your taxable estate at full market value on death. This is one of the most common misconceptions in IHT planning: investors in VCTs for their income tax and CGT advantages often assume the IHT benefit also applies, but it does not.
Why do EIS shares qualify for BPR but VCT shares do not?
The difference is that EIS shares are shares in individual unquoted trading companies. When you invest in an EIS company, you hold shares directly in that specific private company — an unquoted share within s105(1)(b) IHTA 1984. After two years, those shares attract 100% BPR. When you invest in a VCT, you hold shares in the Venture Capital Trust itself — a company listed on the LSE main market. The underlying VCT portfolio may consist entirely of unquoted companies, but the investor does not hold unquoted shares: they hold listed shares in a quoted fund. BPR is not available for shares in the quoted VCT fund even if the fund's underlying investments would individually qualify. This structural distinction — direct unquoted shareholding versus holding via a listed wrapper — is the reason EIS qualifies for BPR and VCT does not.
What about AIM shares — do they qualify for BPR unlike VCTs?
Yes, AIM shares do qualify for BPR. Although AIM shares are traded on the Alternative Investment Market, AIM is not a 'recognised stock exchange' for BPR purposes within s105 IHTA 1984. HMRC treats AIM shares as unquoted for BPR, so shares in qualifying AIM-traded companies attract Business Property Relief. From April 2026, as a result of the October 2024 Budget reforms, AIM shares qualifying for BPR attract 50% relief rather than the previous 100% — giving an effective IHT rate of 20% rather than nil. VCT shares, by contrast, are listed on the LSE main market which is a recognised stock exchange — so they are quoted and outside BPR entirely.
What are VCTs good for from a tax planning perspective?
VCTs offer three significant tax advantages that have nothing to do with IHT: (1) Income tax relief — 30% income tax relief on VCT subscriptions up to £200,000 per year, provided the shares are held for at least five years. This is one of the most generous income tax reliefs available to UK individuals. (2) Tax-free dividends — dividends paid by a VCT are exempt from income tax, regardless of the investor's marginal rate. (3) CGT-free growth — any gain on disposal of VCT shares held for the minimum period is exempt from capital gains tax. For higher-rate and additional-rate taxpayers seeking to shelter income or reduce CGT on gains, VCTs can be highly effective. For IHT planning specifically, EIS (or SEIS) is the relevant vehicle — VCT is not. A properly constructed investment portfolio often uses both: VCT for income and CGT efficiency, EIS for IHT relief and CGT deferral.
How should I structure investments if I want both income tax relief and IHT planning?
The standard approach for investors seeking both income tax relief and IHT efficiency is to combine VCT and EIS investments. VCTs give 30% income tax relief (up to £200,000 per year) and tax-free dividends and growth, but do not give IHT relief. EIS gives 30% income tax relief (up to £1 million per year, or £2 million for knowledge-intensive companies), CGT deferral, and 100% BPR after two years. An investor who wants to shelter income tax may subscribe to both VCTs and EIS, while using the EIS portfolio specifically for IHT planning. The EIS portfolio is held for the two-year BPR minimum and will fall outside the estate on death; the VCT portfolio will be in the estate but may have grown significantly tax-free. Including EIS holdings in your will with clear instructions to the executors about how to claim BPR is essential — the relief is available but must be claimed on the IHT return.
EIS Holdings in Your Estate? Include Them in Your Will
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