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Naturally your clients will hope that any investment they make will do what they want it to do. However, there is always a risk that things won’t go to plan. They may get less back from their investment than they put in. And with a tax-efficient investment, there’s the risk that tax rules can change, or that the investment doesn’t provide the desired tax benefits for some other reason.

We’ve put together this guide to help you explain to your clients the kind of risks they should think about before making an investment with Octopus. The first section looks at risks to capital. The second looks at risks to tax benefits.

Please note that we do not offer investment or tax advice.

Things to think about before putting capital at risk

With any investment, people hope it will go up in value, or at least preserve what they already have. However, its value, or the income they receive from it, could go down. This means investors may get less back from their investment than they put in. Investors should always remember that the way an investment has performed in the past is not a guide to how it will perform in the future.

Different types of investment involve different types and levels of risk. So it’s important that your clients build a portfolio of investments which reflect their tolerance for risk over the timeframe they’re planning to invest for.

Investment performance

The value of many investments fluctuates in response to company and economic news. The extent to which this happens depends on the type of investment it is. For example, company shares, also known as equities, can rise and fall significantly from day to day. Some managers will attempt to reduce the volatility of their portfolio by holding several different companies which may not all react the same to changes.

Risks associated with specific types of investment

As well as the general risks outlined above, some investments involve specific risks that investors need to bear in mind. The most important of these are listed below.

Smaller companies

Shares in smaller companies can experience bigger and more abrupt price movements than larger company shares. This may be a result of relying on limited product lines, markets or resources.

In addition, it can be more difficult to sell shares in smaller companies, as there are usually fewer potential buyers in the market. This means that investors may not always be able to access their capital as quickly as they would like.

Inflation risk

Over time, inflation will reduce the value of investments in real terms.

Currency risk

The bulk of the investments Octopus makes are in the UK. However, some of our products may invest money abroad. Overseas markets may be affected by different influences than the UK market. For example, overseas investments may be exposed to changes in the currency exchange rate, which may make these investments higher risk.

An investment company like Octopus may try to counteract the effect of exchange rate changes through ‘hedging’. It is not always possible to do this perfectly, however, especially at times of extreme market volatility. It may also involve extra costs. Read the relevant product literature for more details.

Note that our investment products are available to UK investors only.

Things to think about before making a tax-efficient investment

It is important to keep in mind that the way an investment will be treated for tax purposes cannot be guaranteed in advance. There are three main reasons for this. The first is that tax treatment depends on individual circumstances. The second is that tax rules may change in the future. And the third is that, for some tax-efficient investments, the tax reliefs depend on the portfolio companies maintaining their qualifying status.

Her Majesty’s Revenue and Customs (HMRC) will consider a claim for tax reliefs based on the facts when a claim is made, including the relevant legislation in place at the time. Here at Octopus we’ve designed our products based on current legislation, interpretation based on case law and HMRC practice. We’re very thorough, but we cannot provide an absolute guarantee that your client will receive the expected tax reliefs.

Remember that tax efficient investments put capital at risk

Even though one reason for investing may be to claim tax relief, investors should still keep in mind that our tax-efficient investments put capital at risk.

Also remember that the shares of smaller companies and VCT shares could fall or rise more than other shares listed on the main market of the London Stock Exchange. In other words, their share prices may be more volatile. They may also be harder to sell, as we mentioned earlier. This means that investors may not always be able to access their capital as quickly as they would like.

 

A final summary

We’ve taken great care to design popular investment products that help investors grow their capital or preserve the capital that they’ve built up. Some of these investments make use of tax reliefs. However, investors should always keep in mind that capital is at risk and that tax reliefs cannot be guaranteed. Before making any investment, investors should make sure to read the specific risks that relate to that product, which can be found on the relevant product webpage and product literature.

Head to our products page to find out about the benefits and risks of our different products.