Looking beyond ‘vanilla’ tax-efficient investments can benefit you and your clients

26 July 2021

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Jessica Franks, Head of retail investment products at Octopus Investments, explains why having knowledge of a wider range of investments will leave you with a stronger business this year.

Pensions and ISAs are excellent tax-efficient investments, but looking beyond these is an important way to add value to a client’s planning. By failing to consider additional ways to invest tax-efficiently, you may be coming up short.

Indeed, a growing number of clients will need to think outside the box when it comes to their planning as they make full use of their allowances.

Take the lifetime allowance (LTA) on pensions for example. This limit on the amount you can invest in your pension while still benefiting from tax advantages is frozen until at least 2026.

Inheritance tax thresholds could also impact clients – the nil-rate band and residence nil-rate band are also frozen at current levels until at least 2026.

These freezes are set against a backdrop of soaring property prices, rising asset values, recovering stock markets and increased propensity to save during the pandemic.

The need for additional options beyond everyday tax-efficient investments has increased. Those equipped to advise on more specialist investments can build a stronger proposition and generate better outcomes for clients.

Beyond Pensions and ISAs

In a survey commissioned by Octopus Investments, 81% of advisers felt the LTA would impact more of their clients over the next 10 years.[1]

Many advisers have already turned to Venture Capital Trusts (VCTs) to complement retirement planning where clients are at risk of breaching their LTA.

VCTs are listed companies that invest in a diversified portfolio of small unquoted companies. These investments involve exciting, progressive young businesses that offer the potential for strong growth. But because early-stage companies carry greater risk for investors, VCTs offer attractive tax reliefs to compensate for some of this additional risk.

Investors can claim up to 30% upfront income tax relief on their investment, provided they hold VCT shares for five years. And dividends paid out by VCTs are free from income tax, meaning they can generate a tax-free income stream.

For some clients, the Enterprise Investment Scheme (EIS) is another option to explore. EIS investments offer the opportunity to access early-stage businesses through a more concentrated portfolio of shares directly held by the investor.

These investments come with an attractive package of tax reliefs, including 30% upfront income tax relief, tax-free growth, loss relief that can be claimed against income or gains, and the ability to defer capital gains.

But you’ll want to bear in mind that these generous tax benefits reflect the high-risk nature of the investment.

IHT planning

Rising asset values and freezes to the nil-rate bands could also mean clients seek out inheritance tax advice. Indeed, a survey by The Openwork Partnership found 60% of advisers expect demand for IHT planning to rise in the year ahead.[2]

While traditional options like gifting will work for some, many clients have concerns about surviving the seven-years required for the gift to be tax efficient, and retaining access to their wealth in later life. It’s likely these concerns have become more important to clients during the uncertainty of the pandemic.

Investments that qualify Business Property Relief (BPR) can help clients plan for inheritance tax in a shorter time frame, while also keeping wealth in their own name. If a client holds a BPR-qualifying investment for two years, and still holds the shares on death, it is zero-rated for inheritance tax. If circumstances change and the client wants to access their investment, they can request a withdrawal, subject to liquidity. This ability to request withdrawals can give peace of mind and help clients to take action.

The risks of these investments

It’s important to understand that the potential benefits of VCT, EIS and BPR investments come with risks.

The value of an investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they invest. The shares of unquoted companies and VCTs could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies or the VCT maintaining their qualifying status. 

Growing your business

These kinds of tax-efficient investments won’t suit every client, but without considering a full range of options, you and your clients may be missing an opportunity. Even if a client decides it’s not for them, bringing something new to an annual review shows you are always thinking and adding value.

Discussing and recommending these products can lead to advising on new assets. A survey we commissioned suggests 40% of advisers have found recommending these investments has led to advising on client assets they hadn’t previously. It also helps with client retention, as 39% of advisers feel that recommending specialist tax-efficient investments has ensured they haven’t lost clients to other wealth managers.[3]

In some cases, discussing IHT planning with clients can lead to engagement with the next generation, paving the way for a client’s beneficiaries to become future clients.

Gaining the right knowledge will help you recommend effective tax planning strategies and grow your business. Octopus can help you do this.

Sign up to the Octopus Online Show, airing on 21 September at 11 AM to learn more about tax-efficient investing and key planning opportunities that might exist in your client bank. Visit: https://octopusinvestments.com/resources/webinars/tax-planning-show/

These investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. 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: July 2021. CAM011169

[1] VouchedFor survey of 700 financial advisers, January 2021

[2] https://www.theopenworkpartnership.com/news/iht-advice-boom-as-advisers-forecast-strong-growth/

[3] VouchedFor survey of 700 financial advisers, January 2021

Professional Paraplanner