Partner Content by Octopus Investments

Planning opportunities for clients who own a business

Are your clients maximising their options?

Clients owning a business can face unique tax planning scenarios, including some where it may be attractive to make an investment that qualifies for a tax relief. That means there is a central role for you as a financial adviser, helping clients decide whether or not to make such investments and recommending suitable products.

Consider a day in the life of Roger, a hypothetical adviser with two client meetings scheduled. Both clients run their own business, but have very different tax planning situations.

Sam’s IT consultancy business

For several years, Sam has been running a steady IT services business. Recently, business has picked up substantially. Sam has acquired two new clients alongside existing business.

As a result, Sam’s limited company shows significantly higher profit than he originally forecast. Sam is looking to take some surplus money out of the business to invest in his own name. However, he’s aware that an increased dividend means an increased income tax bill.

Sam is interested in tax efficient investment of his business profits, but less keen on contributing to his pension since he may wish to access the funds sooner than that would allow him to.

Roger meets with Sam, and learns that he is forecasting a £70,000 dividend, which will be surplus to his needs. Sam’s risk profile means he’s willing to invest some of the money for more than five years, and in smaller companies to help them grow. Roger suggests investing in a Venture Capital Trust, which would allow Sam to claim upfront income tax relief equivalent to 30% of the total VCT investment.

Since VCTs were first introduced, they’ve become increasingly popular, particularly with those who are risk tolerant and regularly contribute to personal pensions and ISAs. They are proving especially popular with business owners like Sam.

Sam invests £44,083.33 into a VCT. His 30% upfront tax relief is equal to the dividend tax due on his £70,000 dividend. Sam can therefore recover the tax paid on his dividend, leaving him holding an investment of £44,083.33 and £25,916.67 in cash. 

Louise is selling her PR firm

Roger’s next meeting is with Louise. She plans to retire and intends to sell her public relations business. She’s meeting Roger to discuss how this will impact upon her personal finances.

One important area of discussion is Louise’s estate planning and how this could benefit her children and grandchildren. 

Using the Octopus guide ‘Untangling inheritance tax’, Roger presents Louise her options. Louise is especially interested to learn how she could benefit by investing proceeds from the business sale shares of one or more BPR-qualifying companies. Roger explains that while it normally takes two years for a BPR-qualifying investment to be zero rated, if someone sold shares in a qualifying business within the last three years and reinvests some or all of the proceeds into another BPR-qualifying business, that investment should qualify for BPR straight away. In other words, the minimum holding period is met immediately.