Authored by Octopus Investments
For professional advisers and paraplanners only. Not to be relied upon by retail investors.
With rates on cash savings climbing, it’s harder for clients to appreciate the value of advice. It has also become harder for advisers to recommend investments to clients while justifying advice fees.
However, tax planning and tax-efficient investments are a way to meaningfully help suitable clients. They can be a great addition to the right client’s portfolio, and make commercial sense for your business.
Why tax-efficient investments
“The most common problem faced by clients who are business owners is taxation,” explains Martin Cliffe, Practice Principal of The Martin Cliffe Practice.
“It’s been a challenging last three or four years for obvious reasons,” says Martin. “But tax-efficient products stand out as very beneficial. I have lots of happy clients as a result.”
Martin uses tax-efficient investments, including Venture Capital Trusts (VCTs), the Enterprise Investment Scheme (EIS) and Business Relief (BR)-qualifying investments, with a broad range of clients. That includes recommending them to clients who own businesses to support their tax planning. This might involve using investments to help clients extract profit tax-efficiently, or helping clients plan for the inheritance tax and capital gains tax implications when selling a business.
“I really look forward to meeting business owning clients because the products we have are so valuable,” explains Martin. “Because we specialise in tax-efficient investments, we receive more referrals and recommendations on tax efficient products than any other product by quite some margin.”
“We recently helped a lady that sold her share in a business and wanted to plan for inheritance tax.”
When a client sells a business that would have qualified for relief from inheritance tax, the cash proceeds become liable for inheritance tax.
“We explained that she didn’t have to give away her assets to manage inheritance tax. She could make a BR-qualifying investment.”
Ordinarily, a BR-qualifying investment would have a two-year holding period to become free from inheritance tax. But due to replacement relief, a client’s investment should qualify for relief immediately, provided their funds are invested within three years of the sale of their business.
“Because the money’s coming from a qualifying asset, she didn’t even have to wait two years for relief.”
Understanding the key risks
Advisers have to make sure any recommendation of these products is relevant and suitable for the client in question – the client needs to understand that invested capital is placed at risk in a high-risk asset class, and that the investment will be subject to more volatility risk and may prove more difficult to sell when the time arises. The tax benefits depend on the investor’s individual circumstances, and on the investment maintaining its qualifying status. Associated tax rules could also change in the future.
Unlocking tax planning opportunities with your clients
To help you deliver good outcomes with tax-efficient investments, we recommend visiting our planning scenarios webpage. It houses a range of client scenarios to help you see how tax planning can support your clients – not only business owners, but across the entire client bank.
You’ll also find interviews with financial advisers, including Martin Cliffe, on how both their business and clients have benefitted from recommending tax efficient investments.
Tax-efficient investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. This communication does not constitute advice on investments, legal matters, taxation, or any other matters. Personal opinions may change and should not be seen as advice or recommendation. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. CAM013363-2309
