Ombudsman Sarah Tozzi stated the customer, Mrs B, was not given ‘suitable advice’ when making an investment in an Octopus Eureka Investment Scheme (OEIS) to obtain inheritance tax relief.

In 2010, Armstrong Watson Financial Planning advised Mrs B to invest £200,000 into an EIS and recommended a further investment of £40,000 a year later.

The EIS was recommended on the basis that it would provide inheritance tax (IHT) relief if held for two years by the date of death, with a further 20% income tax relief becoming available if the investment was held for at least three years.

However, when Mrs B passed away in 2016, the estate was only able to withdraw £38,000, with the remaining £94,000 held as illiquid.

The estate maintained that ‘significant capital losses’ were sustained, and that Mrs B was ‘unaware of the risk of illiquidity’ after her death and had wanted to retain access to her funds during her lifetime.

In response, Armstrong Watson Financial Planning argued that the recommendations remained suitable for Mrs B’s needs as they ‘met her objectives of inheritance tax relief’ and income provision.

The firm stated that the risks were ‘properly explained’ at the time and it was the customer’s choice to proceed with the investments despite her cautious attitude.

The FOS investigator said Mrs B, who was 86 at the time the advice was given, could withstand capital losses, and had over £1.2m assets, a large proportion of which was held in cash following a house sale.

The OEIS did provide income tax relief and inheritance tax relief, so this was partially in line with Mrs B’s objectives.

However, the FOS said it was ‘not persuaded’ that the investment was in line with the investor’s attitude to risk. Mrs B had limited investment experience and was a cautious investor, the FOS held.

The FOS said: ‘Our investigator was not satisfied that the high risk nature of the OEIS had been explained to her. Mrs B had wanted to retain access to her funds and it wasn’t clear that the illiquid nature of the investment was understood and it did not meet her objectives for funds to pass to her family on her death.

‘To put things right, our investigator recommended that the estate be compensated for the return the capital sums would have achieved had they been invested in half in the FTSE Total Income Return and half in fixed rate bonds, less any tax relief received.’

Armstrong Watson Financial Planning maintained that the recommendations were suitable for Mrs B and that she chose to take higher risks to gain tax advantages.

Tozzi said: ‘The report did state that the OEIS was a high risk strategy but I was not persuaded it was made clear to Mrs B that she stood to lose all her capital if the investment failed. Rather, the letter focused on tax relief, stating the investment would lead to a £16,000 saving on inheritance tax, which was misleading as it assumed the capital sum would retain its value.

‘In my view, it was not made clear that the funds would become illiquid once invested and would be tied into the investment for at least four years, if not longer. That was a material risk factor and a relevant consideration, as it was clear that Mrs B wanted to retain access to her funds and give access to her capital to her beneficiaries.

‘I was also persuaded by the testimony of Mrs B’s daughter who attended the meetings with the adviser. She recalled that the level of risk exposure and risk of long-time illiquidity was not made clear.’

The FOS ordered Armstrong Watson Financial Planning to pay £160,000 in compensation to the estate.