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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.

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