Planning opportunities for clients who own a business

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.

Risks that Sam and Louise should keep in mind

VCTs and BPR-qualifying investments are not right for every client. The value of these investments, and any income from them, can fall as well as rise. Investors may not get back the full amount invested.

In addition, the shares of BPR-qualifying companies and VCTs can fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Clients also need to be aware that tax treatment will depend on their personal circumstances, and tax rules may change in future. Tax reliefs also depend on the companies a client invests in maintaining their qualifying status for the relevant relief.

Identifying opportunities – watch the VCT, EIS & IHT special

Tune in to the Octopus Online Show on Thursday 5 November at 10am for a tax planning special.

We’ll be looking at areas of opportunity in advisers’ client banks and how tax-efficient investments can help clients in a variety of situations.

You’ll also hear from other financial advisers about the role these types of investments pay in their own clients’ planning.

For more information, and to reserve your place, click here

Jessica Franks, Head of Tax

VCT and BPR-qualifying investments are 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 authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London EC1N 2HT. Registered in England and Wales No.03942880. Issued: October 2020. CAM010251.