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Two client planning scenarios to consider

by | Feb 7, 2024

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Article written by Octopus Investments

For professional advisers and paraplanners only. Not to be relied upon by retail investors.

As tax year end approaches, a natural focus is placed on maximising any investment and tax planning opportunities with clients.

 

Here are two scenarios you might not have considered.

A client wants to carry back income tax relief

Chris is self-employed and a high earner. His income can fluctuate from one year to the next, meaning he often doesn’t know what his tax bill will be until he has finished preparing his tax return.

Tax year end is nearing and Chris wonders if there is a way he could offset his income tax bill from the previous tax year, while also supporting his wider objectives including capital growth and diversification.

One option could be to invest in companies that qualify under the Enterprise Investment Scheme (EIS). He could carry back 30% upfront income tax relief to the previous tax year.

Tax year end is the deadline by which someone must invest in qualifying companies if they would like to carry back income tax relief to the prior tax year. But typically, it can take up to 12 months for money to be fully invested in a portfolio of individual EIS companies. This can make offsetting income tax in the prior year uncertain when investing at the end of the tax year.  

However, Chris could invest in a knowledge intensive EIS fund, which works differently. The relevant date for income tax relief for such a fund is the year the fund closes, giving greater certainty of being able to carry back tax relief to the prior year.

An ex-landlord is targeting a tax-efficient income

Bobbie decided to sell an additional property, because her buy-to-let income was being squeezed by evolving legislation.

She now has the cash proceeds from the sale of the property and is looking for ways to invest for the future. She’d like to do so tax-efficiently and is keen to diversify her income now she no longer has rental income from the property.

She could consider a Venture Capital Trust (VCT) as part of her planning. This would allow her to target a tax-free income (typically targeting a 5% dividend yield) while diversifying her sources of income.

 

She could also consider making an EIS investment with a portion of the proceeds. Bobbie made a gain when selling her property and EIS would allow her to defer the gain she crystallised. So, instead of paying capital gains tax now, this would allow her to give the capital that represents a gain a chance to grow over the lifetime of the investment. The gain would come back into charge at the prevailing rate when individual companies within her EIS portfolio were sold.

Understanding the risks

Advisers must make sure any recommendation of these products is relevant and suitable for the client in question.

The value of the investments, and any income from them, could fall as well as rise. Investors may not get back the full amount they invest.

Tax treatment depends on individual circumstances and may change in the future.

Tax relief depends on EIS portfolio companies and VCTs maintaining their qualifying status.

The value of VCT and EIS shares may be more volatile and they may be harder to sell than the shares of larger listed companies.

 

Next steps

You can use our client planning scenarios to help you deliver good outcomes. They’ll help you see how tax-efficient investments might help a variety of your clients.

You can also watch a series of interviews with financial advisers covering how they use tax-efficient investments.

Explore the client planning scenarios >>

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. Issued February 2024. CAM013695.

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