Post-Budget Views by Hybridan

28 November 2025

The Budget wasn’t all doom and gloom, for the City, there were some positive initiatives that could help.

“If you build here, Britain will back you”

Watching the Budget, the room certainly perked up and excitation levels were simmering with the killer quote “If you build here, Britain will back you”.  What could it be? VCT lifetime limit scrapped?  Using VCT monies to make acquisitions?  Allowing VCTs to buy secondary shares to reward founders?

None of the above.  Instead, let’s reduce VCT income tax relief to 20% and make it less attractive for investors to put their money in VCTs.  We can only hope that this is counteracted by the positive and very welcome steps made to increase the annual and lifetime limit that VCTs are allowed to invest in qualifying companies. The positive changes that we will come onto in EIS, VCT are very welcome, and we do not wish to come across as ungrateful. Every little helps!

In our market, however, history can come back to bite you. In the tax year 2006/07, following the year when the VCT income tax relief was cut to 30%, VCT fundraising plunged to £270m — a drop of roughly two-thirds.  It’s going to be a nervous time for VCTs in the run up to fundraising season.  VCTs raised £895m in the 2024/25 tax year — the third highest annual total on record.  The result?  VCTs reload and have the firepower to provide growth capital to fund the next Quantex, Zoopla, Cazoo or Depop of tomorrow – British Unicorns that wouldn’t be where they are today without that early-stage growth funding led by UK VCTs.  Those companies create vast amounts of jobs, make significant contributions to our GDP and foster innovation and R&D, ensuring we remain competitive on the global stage in the global race to develop AI and Quantum Computing.  Their valuable contribution should not be an unknown to the Treasury.  

One of the central messages of the Chancellor’s Mansion House speech in July 2025 was to ensure companies are supported to raise money in the UK, stay in the UK and attract long-term investors.  This is in stark contrast to then materially reducing the incentive for investors to commit capital into illiquid/high risk investments.  An unintended consequence of this would be for investors to abandon VCTs from their portfolios and direct their money into higher income tax relief vehicles such as pensions.   

Whilst the negative relief impacts on VCTs, the income tax relief available on EIS remains at 30%.  Thankfully, both EIS and VCT schemes remain available until at least 5 April 2035.  It wasn’t all doom and gloom – the annual limit that can be invested into companies via VCT and EIS to was raised to £10m and £20m for so-called ‘knowledge intensive companies’ (KICs), as well as increasing the lifetime company investment limit to £24m, and £40m for KICs.   The limit on company gross assets will also increase, to £30m before share issuance, and £35m after, from April 2026. 

These changes will bode well for companies who had maxed out their EIS/VCT allowance, as before they would have been prohibited from taking more investment even if the demand were there.  However, we hope the reduction in income tax relief for VCTs doesn’t dampen underlying investor appetite for them, as the investment limit increases and lifetime limit changes would be meaningless if there is not sufficient capital in the VCT pot to begin with. 

EIS and VCT serve very different investment purposes – EIS provides great springboards for growth companies to validate business models and to demonstrate commercial sales.  Once hitting circa £1m Annual Recurring Revenues for instance, which is when some VCTs may become interested to deploy the meaningful seven figure sums to enable companies to scale at pace. 

This tried and tested “Incubator style” investment approach whereby companies progress from EIS to VCT funds works incredibly well and shows the symbiotic relationship between the two tax structures.  Limiting the attractiveness of VCT could potentially cause a clogged bottleneck in our funding ecosystem where there is not sufficient capital for companies to progress from EIS to VCT investors.   

The other welcome shift benefiting founders was the reform on EMI share option schemes.  Under the old framework, EMI expired after ten years and was capped at 250 employees.  Under the new rules, option lifespans extended to 15 years, the employee cap doubled to 500 and the asset limit increased from £30m to £120m.  These are important steps as EMI frameworks are vital tools founders use to retain and incentivise key staff who are vital for growing successful businesses.    

Extending the age limit on EMI is an interesting development as it recognises the time it takes for businesses to crystalise value for shareholders.  It would be great if that same logic were applied to the EIS/VCT limits – ten years since first commercial sales for standard companies and 15 years for KICs would be a good start.  Maybe next Budget, Chancellor?

Time will tell if the three-year exemption from stamp duty will help with sentiment towards main market IPOs, however it will do nothing to reverse the structural impact of fund redemptions plaguing the sub £50m market cap sector.  The frustrating fund manager feedback of “That is a great, profitable growing business, but unfortunately its too small and illiquid for our fund” is worryingly on the rise and this Budget went little in the way of addressing that issue. 

This important win on the lifetime limit was down to the relentless lobbying from key stakeholders in the VCT community such as the VCTA and QCA.  It just goes to show, lobbying in our market works and it should never stop!  These EMI, SDRT, and some EIS and VCT amends in the Budget should benefit the City; as with the amendments made by our regulators on the Main Market and LSEG for the AIM Review currently underway. The rest is up to us to be positive and can do in approach.

By Niall Pearson

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