Mortgage & Property

New Insurance Professional

Family Office Bulletin

Mortgage Property

Insurance Professional

Family Office

Tax Year End Planning – the three pillars

Andrew Aldridge, Partner and Head of Marketing, Deepbridge Capital 

The tax year end is always an immovable deadline for financial advisers, with the period between the previous tax year’s self-assessment deadline of 31 January and 5 April being particularly important for prudent tax planning. When it comes to this specifically, a well-respected adviser once said to me, “my tax planning follows three simple steps; firstly pension, secondly ISAs and third EIS (Enterprise Investment Scheme).”

As a savvy adviser, he of course also utilised the myriad of complex tax planning structures and tools at an adviser’s disposal, and as it is for many clients, mitigating against inheritance tax (IHT) was at the forefront of all planning. However, while all advisers utilise and, where possible, maximise their clients’ pension and ISA allowances, the third pillar – EIS – is still underutilised by many.

The Enterprise Investment Scheme is a decades-old Government initiative, which follows pensions and ISAs in being a tax incentivised scheme to encourage investor behaviour. The behaviour in this instance is the focus of capital towards growth-focused early-stage companies. The UK Government encourages this through unrivalled and generous tax reliefs, with the aim of supporting job creation and the development of innovative companies – with a particular focus on those companies creating UK-based intellectual property and highly skilled jobs, broadly termed as Knowledge Intensive Companies.

Contrary to popular belief, EIS isn’t just for the ultra-high net worth but should be considered, as part of a diversified portfolio, for any investor. Taking a mid-level executive who has C.£80,000 of investable assets each year, including pension scheme participation as a case study. For simplicity, they can maximise their pension allowance at £40,000, their ISA allowance at £20,000, with £10,000 in cash and £10,000 in stocks and shares, leaving a remaining £20,000 to be allocated. Even if £10,000 goes into listed stocks because the adviser and client agree that is what they’d like to do, that leaves £10,000 for an EIS investment.

This is a long-term investment in unquoted and illiquid stocks, and is therefore not without an element of risk. However, in return for this high-risk investment the client receives £3,000 in income tax relief which can be claimed against either this or the previous tax year in as little as a few weeks after investment. It can also be used to defer Capital Gains Tax (CGT) from recent years, and benefit from CGT exemption on growth, while kicking off estate planning with IHT exemption and, in the worst-case scenario, the investment will be eligible for loss relief.

Furthermore, if the adviser is charging a 3% advice charge, then the best result for the client, is that the income tax relief on the EIS investment at least equates to more than the cost of advice.

Other than the tax reliefs already highlighted, the EIS investment should also represent a long-term investment, targeting significant tax-free growth.

For those advisers regularly using EIS, then this should resonate, but for many advisers, tax efficient investments are still not considered as regularly as they perhaps should be.

With returns for the 2019/20 tax year now submitted, it is important to note that investors can use “carry back” to offset income tax against this bill. The important consideration here is that the EIS manager must be able to deploy the capital by 5 April, as this is the critical date for utilising carry back to the previous tax year.

Advisers should note that tax year end planning is not just about maximising pension and ISA contributions. EIS should equally be part of the consideration as the third pillar of tax planning. With many individuals having deferred payments to HMRC during 2020, there will likely be many facing larger tax bills than they have witnessed previously, so using a Government initiative, such as EIS, to reduce this liability should be at the forefront of prudent financial planning.

With nearly all national advisory firms, networks and compliance support providers now offering training and support for advisers looking to utilise tax efficient investments, such as EIS, it has never been easier for advisers to recommend.

This Week’s Most Read

  • Sir Keir Starmer in pub brawl?

    Predictions of scuffles in pubs came true today, with a landlord being ejected from his own pub by interlopers. Sir Keir Starmer had been listening

  • Class of 2021 retirees at risk of running pension pots dry

    Two thirds (66%) of 2021 retirees risk not having the pension savings to sustain their planned retirement income, according to a new report launched today

  • Sir Keir Starmer, pubs and COVID – taking the piss, not taking a piss..

    We thought you weren’t allowed into pubs these days? Incredible scenes erupted today outside the Raven Pub in Bath, as Sir Keir Starmer was confronted

  • New financial advice service from Vanguard aimed at retirement savers

    Designed for investors saving for retirement, Vanguard Personal Financial Planning launches on the award-winning Vanguard UK Personal Investor platform – vanguardinvestor.co.uk/financial-advice. The service offers personalised

  • The Coming Decade for Climate Solutions

    Randeep Somel, Fund Manager, M&G Climate Solutions Fund, is finding reasons to be cheerful as he uncovers some of the powerful drivers of change which

  • Deepbridge achieves record EIS fundraising levels

      Record £29 million deployed across 37 growth companies Deepbridge attributes success to intermediary relationships and sector focus Venture capital investment manager Deepbridge Capital today

  • Using “the family approach” to encourage timely estate planning

    An unprecedented number of clients have delayed financial decisions because of the pandemic. But an indirect approach can help turn hesitation into urgency. Nick Bird,

  • A Positive Charge

    Ben Constable-Maxwell, Head of Impact Investing at M&G Investments, is one of the driving forces behind the move to integrate ESG, sustainability and impact investing

  • Advice firm highlights how growing reputation boosts referrals amid pandemic

    National financial advice firm, Tenet&You, which opened its new offices at Haddington in December last year, has reported an increase in new business since the

  • The Superbia Group commits to accountability and living its core values with the formation of a new independent ESG Advisory Board

    The Superbia Group has today signalled its intent to live its values by announcing the appointment of a new independent ESG Advisory Board. The new

IFA Magazine

Keep updated on the most important financial events 

Make sure you are an informed

wealth professional..

Adblock Blocker

We have detected that you are using

adblocking plugin in your browser. 

IFA Magazine