The last chance to invest tax-efficiently into solar

27 February 2012

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As tax year end approaches, many investors will be looking at the tax-efficient investment options available, and wondering which is right for them. Some will be reminded of the expression ‘don’t let the tax tail wag the investment dog’. In other words, a good tax product should be profitable and where the underlying investment is a good opportunity in itself.

But it’s worth pointing out that the tax incentives and the investment are supposed to go hand-in-hand. The whole point of products such as Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCTs) is to encourage investment in smaller companies that by their nature carry a greater degree of investment risk than a portfolio of larger companies would. Therefore, the tax- incentives should effectively act as a cushion, absorbing the extra volatility associated with the smaller companies market.

At Octopus we make it a point of principle to only launch a product when we are confident that the underlying investments can deliver a level of return that our investors will be happy with. Take our solar-focused Octopus EIS and Octopus VCT 3&4, for example. Both invest into smaller companies that install solar panels and collect subsidies for the installation and also the generation of electricity (known as Feed-in Tariffs or FiTs). As a result, they benefit from the government-approved subsidies and 25-year inflation-linked revenue streams.

Of course, this is why the government had a concern with the inclusion of solar companies in a tax-efficient wrapper. Unfortunately, the subsidies were deemed too large – and the investment risk too small – for the tax incentives that were available alongside them. As a result, from 6 April onwards, this investment opportunity will be closed for good. Solar companies that collect FiTs will no longer be deemed as qualifying investments into tax-efficient products.

Some investors will have read the headlines highlighting the government’s reduction in the FiTs that are available, and perhaps already think that the investment opportunity is gone. But this is not the case. Octopus EIS is still taking in new investment, although we’re planning to close our latest tranche of Octopus EIS at the end of February, which will give us enough time to deploy all of the funds raised into solar companies before the end of the tax year.

As Martin Churchill’s Tax Efficient Review points out, Octopus has been the most successful solar fund raiser in the current tax year. Because of the speed at which we were able to raise funds and deploy them, we had an early advantage over other product providers. Plus we had the foresight to insulate our products against a reduction in FiTs that we expected was a foregone conclusion. This ensured not only that Octopus was the biggest investor into UK commercial solar installations, but also that we have been able to make subsequent investments into solar installations at lower FiTs and still manage to ensure that the EIS is on track to make profits for investors.

We have always been realistic about the returns available from our solar-focused investments, and we made sure we were able to deliver on the promises we have made, putting our customers ahead of our own profits. For example, with Octopus EIS, we will only take our deferred annual management charge (AMC) once we have returned 100p for every 100p invested into the underlying companies.

So, in the run-up to tax year-end, our message to investors is clear. If you’re interested in investing in solar companies that collect solar FiTs, the deadline in which to do this is fast approaching. For the Octopus EIS, you have until the end of February, just three days’ time, in which to invest. However, the Octopus VCT 3&4 will continue to be open for another month, until the end of the current tax year. After this, the investment opportunity that FiTs presented will be gone.

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