Jess Franks, Head of Retail Investment Products at Octopus Investments, talks through a highly relevant planning scenario as we approach tax year-end.
“One of the benefits of investing in companies that qualify under the Enterprise Investment Scheme (EIS), is the ability to carry back income tax relief to the previous tax year.”
With tax year-end approaching, no doubt you’ll be looking at your book of clients to ensure they are making the most of opportunities available to them.
Have they filled their pension? Do they have a large income tax bill that could be offset? Do they have a capital gain they would like to defer?
If so, here’s a timely tax planning scenario to give you an idea of what is possible.
Chris wants to mitigate a prior year income tax bill
Chris is in his late forties. He’s self-employed and a high earner, although his income can fluctuate from one year to the next.
In fact, Chris often doesn’t know what his tax bill will be until his accountant has finished preparing his tax return.
He has a diversified investment portfolio and is an experienced investor. Over the years Chris has made it clear he’s open to being adventurous with a portion of his portfolio, and he’s happy to take more risk to target significant growth.
Tax year-end is just a few months away and Chris wonders if there are any opportunities available that would allow him to offset an income tax bill from the previous tax year, while also supporting his wider planning objectives.
What his financial adviser suggests
Chris meets with his adviser, Helena. She considers Chris’s needs, goals, and appetite for risk, before suggesting a potential investment that could work for him.
Helena explains that one of the benefits of investing in companies that qualify under the Enterprise Investment Scheme (EIS), is the ability to carry back income tax relief to the previous tax year.
Typically, relief can be claimed in the year that money is invested into each individual EIS company, or the previous year. This can make offsetting income tax from the prior year difficult when investing in an EIS portfolio at the end of the tax year.
However, Chris could invest in a Knowledge Intensive EIS fund, which would give him access to a diverse portfolio of early-stage companies with high growth potential.
Importantly, the relevant date for income tax relief when investing in a Knowledge Intensive fund is the date the fund closes, rather than the date each underlying investment is made. So Chris could invest at tax year-end once his income tax bill for the prior year is known and still claim relief against this earlier tax year . His investment would provide him a single certificate which he could use to claim up to 30% income tax relief creating either a rebate or allowing him to offset tax yet to be paid.
