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Partner Content by Octopus Investments

Maximising tax planning opportunities in your client bank

The role of Venture Capital Trusts and EIS investments. 

Beyond pensions and ISAs, how can you help clients invest for the future tax efficiently?

This article is about some tax planning opportunities that could exist in your client bank today. And how two tax-efficient investments could help unlock those opportunities. 

High-earning clients

A good place to start is high-earning clients. Many of these clients will make full use of their annual ISA allowance, and make significant pension contributions that have compounded over the years. 

This was an important client type addressed by Mike Hodges and Alistair Candlish of Carrington Wealth Management, when they featured on the recent Octopus tax planning show.

“There’s a lifetime allowance now on the total sum of your pension,” says Alistair. “And once clients have gone through that allowance, they ask ‘why should I keep adding if I’m going to get taxed later at a higher rate?’”

“Clients are putting pensions to one side now and saying, ‘I’ve done that, now I’ve got to look at other options.’”

Complementing pension planning and other arrangements

One option is a Venture Capital Trust (VCT). These are pooled investments where a client invests in one large, listed company, which in turn invests in a portfolio of small companies.

An investor can claim up to 30% income tax relief on the amount invested in a VCT, on up to £200,000 invested each tax year.

“With VCTs you’ve got an initial income tax relief that you can compare to the tax relief on a pension contribution to some extent,” says Alistair.

“You’ve then got, which I think is a really good feature, tax-free dividends while holding the investment.”

For these reasons, VCTs have become an attractive complementary way to invest for retirement. But it’s important to set expectations with a client, including the risks. 

“You need to help a client understand what to expect from a VCT investment, and the time they have to hold one. A client should only have assets in there they don’t need access to, and they should expect a minimum five-year hold to qualify for tax reliefs.” 

Tax planning opportunities aren’t restricted to high earners

“Landlords can of course claim income tax relief against their rental income when investing in a VCT. This is very helpful,” says Mike.

Where landlords want to invest rental income for retirement, pensions require you to contribute relevant earnings, typically from employment which a landlord may not have. Also, landlords can no longer deduct all their mortgage from rental income. This means some landlords have turned to VCTs to invest their rental income tax-efficiently.

Similarly, you might want to think about business owners who want to extract money from their business.

“A lot of business owners do take income in the form of dividends. And the income tax relief can be claimed against this.” says Alistair.