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13:01 on Thursday
22 July 2004

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Keeping it all - tax-free!


This article sets out some simple ways to arrange your investments for maximum tax efficiency, i.e. to keep as much as possible out of the hands of the Inland Revenue!

The first principle to consider is what you actually want to achieve from investing. For example, to achieve maximum tax efficiency you often have to tie up your money for long periods of time, typically 5 years, with penalties for taking your money out early. So if you are saving up to buy a house in two years time you may get a better overall rate of return on your money from an investment that is not tax-free.

Equally, the level of risk you are prepared to take should be factored into your investment plan. For example, there are some excellent tax breaks for investing in Venture Capital Trusts, but these are very high risk investments that are not recommended for your life's savings.

Another important objective is to make sure you use all the tax and investment allowances and reliefs to which you are entitled. This means doing some basic research as the Inland Revenue is not particularly good at telling people how to minimise their tax bills! The table below is a quick guide to the more widely used allowances and reliefs. Click here to view the table.

Couples (married or not) have more scope for tax planning as they each have a set of allowances and reliefs. Couples can therefore arrange investments between them to utilise both sets of allowances and to ensure tax is payable on investment income and capital gains at the lowest possible rate. However, couples who are not married should be careful about transferring assets between them as a transfer of a chargeable asset (e.g. shares) may give rise to Capital Gains Tax liability (married couples are exempt from this). Such transfers can also have an effect on the transferor's Inheritance Tax position and I will look at this in more depth in future articles.

Following on the theme of "making sure you use what you are entitled to" if you have the opportunity to take part in a company share scheme offered by your employer you probably should. Many schemes "qualify" for favourable tax treatment and will include some form of discount offered by the employer. However, unless you are given shares for free, you will still have to decide whether owning shares in your company represents a good investment.

Remember, whilst a tax free environment for your money is very desirable that should not be the sole reason for choosing a particular investment. Decide what you want to achieve with your savings and then plan to reach that target in the most tax efficient way.

Using what you are entitled to

Income Tax allowances

2001 - 2002

 

Personal (up to age 65)

£4,535

income free of all tax

Personal age 65 – 74

£5,990 *

income free of all tax

Personal age 75 and over

£6,260 *

income free of all tax

Blind Persons

£1,450

income free of all tax

Rent a room scheme

£4,250

Annual rent free of all tax

* Age reliefs reduced by £1 for every £2 of income over £17,600

Income Tax reliefs

 

Relief given @ 10%

Children’s Tax credit

£5,200

max value £520

Married Couples Allowance

 

 

 - older spouse age 66 to 74

£5,365#

max value £537

 - older Age 75 or over

£5,435#

max value £543

# Age reliefs reduced by £1 for every £2 of income over £17,600  (Minimum allowance £2,070)

Savings Schemes

Individual savings Accounts (ISA)

tax free income and gains

   Overall annual subscription limit (including shares)

£7,000

   Cash annual limit

£3,000

   Insurance element annual limit

£1,000

 

 

Tax Exempt Special Savings Account (TESSA)

tax free interest

   No new investment allowed

 

   Capital value carry over to ISA on maturity

£9,000

 

Personal Equity Plan

tax free income and gains

   No new investment allowed 

Internal switching and reinvestment of income permitted.

 

Friendly Society bonds 

tax free capital after 10 year period

   Annual premium limit

£270

   Monthly premium limit

£25

(parents can subscribe on behalf of children)

 

 

National Savings Certificates

tax free growth

   Maximum total holding

£10,000 in each issue

   57th issue (5year fixed)

3.55% per annum compound interest

   7th issue (2 year fixed)

3.65% per annum compound interest

   19th issue of index linked certificates (5years)

1.65% plus inflation linking

   7th issue of index linked certificates (2 years)

2.15% plus inflation linking

For more help and information visit
www.ietaxguard.co.uk

May 2001

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About the author:
Graham Yeatman is the Marketing Manager for 

i.e. taxguard website

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