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Partner Content by Octopus Investments

A thorough knowledge of tax-efficient investments will benefit you and your clients

Jessica Franks, Head of retail investment products at Octopus Investments, explains why looking beyond pensions and ISAs will leave you with a stronger business this year.

Pensions and ISAs are excellent planning vehicles, but looking at additional ways to invest tax-efficiently is an important way to add value to a client’s planning.

A growing number of clients will need to think outside the box when it comes to their planning. Several key allowances are frozen until at least 2026. These are set against a backdrop of soaring property prices, rising asset values, recovering stock markets and increased propensity to save during the pandemic.

Beyond Pensions and ISAs

Take the frozen lifetime allowance (LTA) on pensions for example, a limit on the amount you can invest in your pension while still fully benefiting from any tax advantages.

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

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 allow you to claim 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

Frozen inheritance tax thresholds will also drive demand for creative planning. A survey by The Openwork Partnership found 60% of advisers expect demand for IHT planning to rise in the year ahead.

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.