Tax implications of investing in energy

Many energy companies are listed in the US, and Mr Riley says investors should therefore be aware they have different tax implications for UK investors who own those equities directly.

He says: “This does not apply for investors who invest via a fund that is registered for sale in the UK.

“Investors should check the specific implications of the relevant type of equity fund for their own tax situation.”

While the government tax incentivises investing in many renewable energy companies through the offer, for example, of ‘feed-in tariffs’ for solar energy producers, Andrew Wilson, head of investments at Towry, says advisers should always make sure investors understand this relief could be turned off at any time.

Adrian Lowcock, senior investment manager for Bristol-based Hargreaves Lansdown, says the key thing here is whether you investing in something because it is strong in its own right.

He says: “Is it profitable or is it only profitable because somebody is incentivising your investment in it?

“You should want to invest in a business that is profitable or is clearly going to be profitable, not an industry or company that can only be profitable because of tax incentives.

“With wind and solar power, these are heavily tax incentivised. There may be money to be made there but as an investor you need to be very wary of investing in something that is so subsidised as these subsidies can be withdrawn and therefore there is a lot of risk there.”

Investing in a venture capital trust to access renewable energy themes offers its range of tax incentives:

• Investors receive up to 30 per cent income tax relief on any investment made at launch up to £200,000, provided they pay at least that much income tax. An investment of £20,000 would give investors £6,000 back upfront, either through their tax return or by changing their PAYE code

• There is no capital gains tax and investors are not taxed for any capital growth achieved through the VCT as they are entitled to tax-free capital gains on the disposal of the shares

• Any dividends that the VCTs distribute are tax-free, unlike dividends on regular shares

Renewable energy VCTs do not, by and large, have a stellar performance track record, but the boost of the tax relief provided by the vehicle can protect the amount investors ultimate get back - and if performance is strong can provide a valuable boost.