UK VC Funds Raise $6.9bn, CGT Parity Ruled Out, IFS Flags £35bn Gap & August GDP Beats Forecasts

Record venture fundraising, a Chancellor who's reportedly stepped back from the biggest capital gains tax change investors feared, and an economy that grew when forecasters expected a fall: for investors heading into the Budget, this week's news was better than the mood going in. The picture isn't one-sided though, with a large spending gap still to fill and the Bank of England looking set to raise rates, so the four stories below cover both what's working in investors' favour and what could still change it.

UK Venture Funds Just Had Their Strongest Fundraising Quarter On Record

UK venture capital firms raised $6.9bn across 31 new funds in the third quarter, according to HSBC Innovation Banking UK and Dealroom, more than four times the quarterly average of the past two years. Index Ventures closed three funds worth a combined $3.5bn, Highland Europe raised €1.1bn for its sixth growth fund, and QuantumLight and Crane Venture Partners added $500m and $484m respectively.

The comparison that’s easy to skip is with what went into UK companies over the same quarter: $6.1bn. The two figures aren’t like-for-like, since funds deploy over several years and can invest abroad, but the gap is potentially an indicator of how much capital is waiting for a home. Fund closes also tend to reflect commitments that LPs agreed some time ago, so the quarter probably says as much about confidence earlier in the year as it does about today.

Late-stage companies took $3.5bn, or 58% of the total, with CityFibre's $1.2bn, FNZ's $450m and OLIX's $312m among the largest rounds. Breakout-stage businesses raised a further $1.9bn, while early-stage companies attracted $740m, roughly an eighth of the quarter.

The closes that were named came from established managers, several of them running growth strategies, so the pool that's been raised and the pool early-stage founders are drawing on aren't necessarily the same one. For investors in earlier rounds that cuts two ways. A deeper bench of potential follow-on investors could help companies as they mature, but more capital chasing the strongest growth-stage businesses can also push entry valuations higher.

Semiconductor startups raised $497m in the quarter, taking 2026's total to $1.6bn, already ahead of the previous full-year record of $1.3bn set in 2025, and almost half of all UK semiconductor funding since 2010 has arrived in the past two years. Nine of the ten most active investors in UK rounds were UK-headquartered, and the UK took 25% of European venture investment in the quarter and 35% of the $23.3bn raised so far this year, more than twice the amount attracted by either Germany or France.

HSBC Innovation Banking UK's CEO, Emily Turner, framed the fundraising as giving investors "greater firepower" to back ambitious businesses through their next stages of growth. She was also careful to add that investment will always fluctuate from quarter to quarter, which is a fair reminder that one record quarter isn't yet a trend.

Capital Gains Parity Looks Off The Table, But The Door Isn't Closed

The Financial Times reported on Tuesday, citing four sources, that John Healey won't raise capital gains tax to match income tax. Higher-rate taxpayers currently pay 24% on most gains, against a top income tax rate of 45%, so full alignment would have meant an increase of almost 90% at the top end. Louise Haigh, Wes Streeting and Neil Kinnock were among the senior Labour figures reported to have urged the move.

Two arguments appear to have carried weight. Business leaders have told ministers that a sharp rise would encourage wealthy individuals to leave, and a Wealth Club survey reported by The Times found that 61% of investors with £1m or more in assets had considered moving overseas. There's also the revenue question: gains are one of the few taxes people can choose when to pay, so a higher rate can simply mean fewer sales, and the yield may fall well short of the headline estimates.

The Treasury is said to be developing capital gains relief for entrepreneurs who sell a business and reinvest the proceeds in the UK, according to three people familiar with the plans cited in coverage of the FT report. Nothing has been published, so the cost, the qualifying conditions and the size of any relief are all unknown for the time being.

Ruling out parity isn't the same as ruling out change. Coverage of the briefing has stressed that a smaller adjustment to rates hasn't been explicitly excluded, and the pattern of recent Budgets suggests reliefs and restrictions often arrive together. Venture capital trust investors have already seen upfront income tax relief fall from 30% to 20% from April, a reminder that incentives can move in either direction.

All of these decisions are being made against numbers that haven't been kind to the Chancellor, and the IFS set them out in detail this week.

The IFS Puts A £35bn Question To The Chancellor

In its annual Green Budget, produced with Barclays and published on Monday, the Institute for Fiscal Studies estimated that John Healey may need to find around £35bn if he wants to meet the government's spending ambitions without squeezing public services. The pressure comes from inflation eroding departmental budgets in real terms. Last year's spending review implied a £9bn cut for departments outside health and defence, and Bloomberg reports that higher inflation threatens to add a further £15bn hole to those plans.

Raising £35bn through tax alone would be the equivalent of adding roughly three percentage points to every income tax rate or to the main rate of VAT, which would breach Labour's manifesto commitments. That's why the alternatives, benefit cuts or genuinely tighter spending, keep appearing in the debate.

Bank of England Governor Andrew Bailey warned last week that Britain could face a repeat of the Liz Truss mini-Budget crisis if markets lose confidence in the government's fiscal plans, while Barclays' contribution to the Green Budget identifies fiscal loosening as the main downside risk to sterling. Healey, meanwhile, was due to travel to the IMF meetings in Bangkok this week, where he planned to argue that major economies need credible plans to bring borrowing under control.

For investors, the second-order effects run through the gilt market we covered last week. Higher government borrowing costs feed into mortgage pricing, into the discount rates applied to growth companies and into the cost of debt for smaller businesses. And if a meaningful part of £35bn does come from tax, the question of where it lands, on dividends, on gains, on pensions or on property, is one every investor with assets outside a wrapper has a direct stake in.

Against that backdrop, the latest growth figures gave the Chancellor a little breathing space, though the detail behind them is more mixed than the headline suggests.

August GDP Beats Forecasts, But Rates Are The Bigger Story

The UK economy grew by 0.1% in August, when economists had been expecting a 0.1% fall. Growth over the three months to August came in at 0.7%, helped by upward revisions to June and July, and Healey called the figures "welcome news" ahead of the Budget.

The composition is where it gets more interesting. Production grew by 0.8%, its fastest monthly rate in nine months, with manufacturing up 1.2% on the back of the pharmaceutical sector. Services showed no growth at all, and construction fell by 0.2%. A single sector driving a month's figures can be lumpy, and with services making up the bulk of the economy, flat output there is potentially a more important signal for consumer spending than a factory rebound is for the outlook.

The Bank of England Rate is 3.75%, held on 17 September by a 6-3 vote. Bailey, Sarah Breeden, Clare Lombardelli and Dave Ramsden have all signalled openness to a hike, and money markets are pricing a 5 November increase at somewhere between 80% and 90%..

Beyond November, markets are pricing around four rises by the end of 2027. Capital Economics and Oxford Economics both expect two, taking Bank Rate to 4.25% by February, and Pill himself has questioned whether the Bank will need to go as far as investors expect. Oxford Economics also expects inflation to peak above 4% early next year, which it believes would squeeze consumer spending and hold growth to 0.6% in 2027.

A growth beat can therefore complicate the picture rather than ease it, since stronger activity supports the case for tightening at the same moment inflation is the Bank's primary concern. The next few days will test that, with labour market data due on Tuesday 20 October and September CPI on Wednesday 21 October, following August's 3.1%.

Final Note

 The next two weeks decide a lot of what we’ve covered here. Labour market figures land on Tuesday 20 October, September inflation follows on the Wednesday, and the Budget arrives on 28 October, a week before the Bank of England’s decision on 5 November. We’ll pick up what moves, and the important news around it.