03: Savings, investment and tax

1. Invest in assets that produce gains subject to capital gains tax
You can make £8,800 tax-free gains in one tax year (for 2006/07), but this is after a discount for taper relief, which reduces capital gains by up to 35% for non-business assets and up to 75% for business assets. So you can sell quoted shares (non-business assets unless you work for the company) held since 1997, make a gain of £13,500 and still pay no capital gains tax! The sale of a business asset held for two years or longer can yield up to £35,200 of tax-free gain.

2. Make the most use of your capital gains losses – even if you have not been able to sell the shares
If you own shares in companies that have gone under, you can claim that those shares now have a negligible value. The amount you originally paid for the shares will be treated as a loss, which can be set against your other gains to reduce your total capital gains tax liability.

3. Claim tax relief on the loss if you have guaranteed a loan made to a UK trading business, and you have had to pay up under that guarantee because the borrower defaulted
The amount you paid counts as a capital loss in your hands that you can use to reduce the tax on your other capital gains.

4. Subscribe for up to £200,000 of shares in a Venture Capital Trust (VCT) in 2006/07, and you could receive a 30p tax credit for each £1 you invest
VCT shares you buy are exempt from capital gains tax on sale, but remember that VCTs can be very risky investments and you must hold them for at least five years to retain your income tax credit.

5. Get instant tax relief for Enterprise Investment Scheme (EIS) investments
When you subscribe for up to £400,000 in EIS shares, you will receive a 20% tax credit to be set off against your income tax bill. EIS shares can be very risky and you have to hold them for at least three years.

6. Defer tax on your capital gains by reinvesting your profits in EIS shares
There is no limit on the amount of capital gains tax you can defer in this way, but EIS shares are a risky investment, so do take informed advice before investing.

7. Use your ISA flexibly and invest early in the tax year to get the full benefit
If you have not already invested in a maxi ISA in the current tax year, you can open a mini cash ISA and use it as a day-to-day savings account. As long as you do not deposit more than a total of £3,000 in one tax year, all the interest earned will be tax-free. Remember, anyone aged 16 and over can open a cash ISA, so encourage your older children to save in this way as well.

8. Allowing your overseas bank to pass your details on to HMRC could save you foreign withholding tax, under the EU Savings Directive exchange of information rules
If you do not give permission for details of your account to be passed on, the bank must deduct withholding tax at 15%, which you can offset against the UK income tax due on that interest. In future years, the rates of withholding tax are due to rise. Do not forget to declare the offshore interest you receive on your UK tax return. HMRC has just won a case that allows it to trawl through the offshore accounts that UK residents hold.

9. Plan your income for the year before you cash in your life assurance bonds
The profit on your bond could push more of your total taxable income for the year into the higher rate tax band. To avoid this spike in your income, you could reduce your other sources of income by closing deposit accounts just before the beginning of the tax year, or by changing the amount you draw from your company or pension fund.Last Updated