Tax Planning

A intelligent piece of year-end tax planning

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

Jess Franks, Head of Retail Investment Products at Octopus Investments, talks through a highly relevant planning scenario as we approach tax year-end.

“One of the benefits of investing in companies that qualify under the Enterprise Investment Scheme (EIS), is the ability to carry back income tax relief to the previous tax year.”

With tax year-end approaching, no doubt you’ll be looking at your book of clients to ensure they are making the most of opportunities available to them.

Have they filled their pension? Do they have a large income tax bill that could be offset? Do they have a capital gain they would like to defer?

If so, here’s a timely tax planning scenario to give you an idea of ​​what is possible.

Chris wants to mitigate a prior year income tax bill

Chris is in his late forties. He’s self-employed and a high earner, although his income can fluctuate from one year to the next​.

In fact, Chris often doesn’t know what his tax bill will be until his accountant has finished preparing his tax return.​

He has a diversified investment portfolio and is an experienced investor. Over the years Chris has made it clear he’s open to being adventurous with a portion of his portfolio, and he’s happy to take more risk to target significant growth.

Tax year-end is just a few months away and Chris wonders if there are any opportunities available that would allow him to offset an income tax bill from the previous tax year, while also supporting his wider planning objectives.

What his financial adviser suggests

Chris meets with his adviser, Helena. She considers Chris’s needs, goals, and appetite for risk, before suggesting a potential investment that could work for him.

Helena explains that one of the benefits of investing in companies that qualify under the Enterprise Investment Scheme (EIS), is the ability to carry back income tax relief to the previous tax year.

Typically, relief can be claimed in the year that money is invested into each individual EIS company, or the previous year. This can make offsetting income tax from the prior year difficult when investing in an EIS portfolio at the end of the tax year.

However, Chris could invest in a Knowledge Intensive EIS fund, which would give him access to a diverse portfolio of early-stage companies with high growth potential.

Importantly, the relevant date for income tax relief when investing in a Knowledge Intensive fund is the date the fund closes, rather than the date each underlying investment is made. So Chris could invest at tax year-end once his income tax bill for the prior year is known and still claim relief against this earlier tax year. His investment would provide him a single certificate which he could use to claim up to 30% income tax relief creating either a rebate or allowing him to offset tax yet to be paid.

Clients must be comfortable with the risks

Investing in EIS companies is high risk. An investment could fall in value, potentially to nil, and investors may not get back the full amount invested.

There are also tax, volatility and liquidity risks to consider.

Shares in unquoted companies cannot easily be sold, as it may take time to find a buyer. When investing in an EIS portfolio, an exit is only possible when each individual company is sold.

The shares of unquoted companies may also fall or rise in value more sharply than shares in larger, more established companies.

A number of EIS tax reliefs depend on companies maintaining their EIS qualifying status for at least three years. It is possible that a company might cease to be EIS qualifying and EIS reliefs previously granted would need to be paid back.

HMRC could change existing tax legislation. Tax treatment also depends on personal circumstances.

A powerful way for investors to target high growth

For a company to qualify for EIS funding, it must be in the early stages of its growth journey. The company must also be unquoted (which includes being AIM-listed for these purposes).

Buying the shares of these kinds of companies can come with significant growth potential because they’re at the beginning of their growth curve. Of course, with this growth potential comes higher risk.

To compensate for some of the risk of investing in early-stage businesses, EIS-qualifying investments allow investors to claim several tax reliefs.

Losses are relievable (against income or capital gains tax), and growth is tax free. This is a powerful set of reliefs for a high risk, high potential growth portfolio.

Additionally, investors can benefit from upfront income tax relief on up to 30% of the amount invested, capital gains deferral and relief from inheritance tax.

An EIS opportunity this tax year-end

Has this planning scenario resonated with you?

Or perhaps you have a client that is selling down a portfolio of investments, and wants to defer their capital gains?

Maybe they want to diversify their portfolio but want to explore ways of retaining valuable loss relief?

We’ll be covering these scenarios and introducing the Octopus Ventures Knowledge Intensive EIS Fund in an upcoming webinar on 15 February 2022 at 11am.

The fund has a capacity of £25 million and will close on 5 April 2022 or when capacity is reached.

This investment is an extension of our evergreen Octopus Ventures EIS Service, which is managed by the same team behind Octopus Titan VCT, the UK’s largest VCT.

The fund structure allows clients who invest to carry back income tax relief to the 2020/21 tax year easily with a single EIS5 certificate.

Register here

The Octopus Ventures EIS Service is not suitable for everyone. Any recommendation should be based on a holistic review of your client’s financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorized and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: January 2022. CAM011772

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