This article is taken from EIS Magazine, where Intelligent Partnership’s research was highlighted. Click on this link to read the original post.
With HMRC’s tax take on the increase, discussing tax-efficient investing with clients is no longer a conversation that can wait until tax-year end. The good news, says Octopus Investments’ Paul Latham, is there are plenty of compelling options available
Tax receipts are piling up at 100 Parliament Street in London. A recent study by The Centre for Cities has calculated just how much the UK is paying. It finds ‘economy taxes’ – so called as they are dependent on the growth of the economy – account for 88% of all tax collected by HM Revenue & Customs (HMRC). In London alone, the combined yield of income tax, VAT, property and corporation tax increased by 25% in real terms over the past decade.
Inheritance tax is also included as an economy tax. This is apt considering the Office for National Statistics forecasts that £4.6 billion will be raised in inheritance tax receipts for the 2015/16 tax year. It’s a figure that’s set to increase too. Annual inheritance tax receipts are expected to top £5.6 billion by 2021 – despite the introduction of the new main residence allowance. So there’s clearly the potential for more families being left with inheritance tax liabilities.
Of course, many advisers are already ahead of the game. And the broad spectrum of investments to choose from these days certainly makes for a richer discussion with clients.
For instance, the government offers tax incentives to people that are interested in investing in qualifying smaller companies, and that are willing to accept the risks that go along with such investments. These incentives are aimed at encouraging greater investment into small businesses that have the potential to provide significant benefits to the UK as a whole, both in terms of job creation and economic prosperity.
In this context, clients might already be familiar with the option of investing in a Venture Capital Trust (VCT). As long as investors are comfortable placing their capital at risk in this asset class, this can be an interesting option for those looking to access smaller companies, for the potential to reduce their annual income tax bill or to complement an existing pension arrangement. Indeed, VCTs are increasingly being seen as a more mainstream part of a retirement planning portfolio – particularly if investors have reached, or are coming close to, the limits of a traditional pension investment.
But there are other options too. Investments in companies that are expected to qualify for Business Property Relief (BPR), could help investors to eliminate or reduce an inheritance tax liability. Once BPR-qualifying shares have been owned for at least two years they can be passed on free from inheritance tax on the death of the shareholder. It’s a government-approved relief that’s already helping many advisers, solicitors and accountants with estate planning arrangements. And a recent tax-planning survey by market research company Intelligent Partnership found 60% of advisers plan to recommend BPR qualifying investments to more clients in the next two years.
It’s often the quality of BPR-qualifying investments that supports their case in any estate planning strategy. Such investments in renewable energy, for example, are underpinned by government incentives like Feed-in Tariffs and Renewable Obligation Certificates. They provide predictable, long-term revenue and are asset-backed – which provides collateral.
The options around tax-efficient investing don’t end there. There are some companies listed on the Alternative Investment Market (AIM) that will also qualify for BPR. So, in return for taking the risk of investing in smaller companies, clients can have a diversified portfolio of AIM company shares which could provide inheritance tax relief upon the death of the investor as long as they’ve held the shares for two years. And if the focus for clients is less about inheritance tax and more about some of the other ‘economy tax’ liabilities, there are certain VCTs that invest in AIM portfolios too.
Clearly, the subject of tax – and government approved ways to reduce or eliminate it – will continue to preoccupy the minds of clients. The personal financial goals of each client are an obvious consideration when helping them plan for the future, but getting the right advice at the right time can make a real difference. With the options now available, it just makes good sense to start the conversation as early as possible.