One lucrative haven for investors likely to exceed the proposed ISA limit is a pension. Provided you have the net relevant earnings, money moved into a pension will receive tax relief at your highest rate of income tax. So a 40 per cent taxpayer who puts pounds 1,000 into a pension receives a further contribution of pounds 666.67 from the tax man. Investors with a large potential ISA excess can maximise the amount they can put into their pension by carrying forward unused tax relief from the previous six years.
Bad news in the Budget on Tuesday could be the abolition of higher-rate tax relief on pension contributions, leaving only basic and lower-rate relief. Even so, this would still give a pounds 1,000 pension investment an immediate uplift of up to pounds 298.
Investors considering following Geoffrey Robinson's example and moving investments offshore should get expert advice before doing so. Offshore investments are offered by many well-known UK financial providers, but while offshore havens like the Channel Islands, the Isle of Man and Bermuda and Luxembourg are outside the UK's tax regime, they can only be used to defer UK tax, not to avoid it completely.
For example, offshore savings accounts can pay interest gross but interest must be declared on the relevant year's tax return and paid in due course. The one big advantage is that until the deadline to pay the tax arrives, you can be earning interest on the taxable element.
Offshore savings accounts with decent rates of interest include Britannia International 90-Day Notice, paying 7.85 per cent gross on pounds 10,000, which requires 90 days notice for withdrawal, and, needing 30 days less notice, Northern Rock (Guernsey) Offshore 60, which pays 7.65 per cent gross on pounds 10,000.
Offshore roll-up funds, the nearest offshore equivalent to PEPs and unit trusts, can defer tax for a longer period of time. Returns accumulate inside the fund so no tax is payable until the fund is cashed in. At this point, they are charged to income tax. This means tax can be deferred for many years, perhaps until the investor retires and moves into a lower tax bracket, or moves abroad and outside of the UK tax regime.
Income seekers looking offshore can opt for distribution funds. However, as with offshore deposit accounts, tax is payable on these every year when income is distributed.
An alternative income generator is an offshore insurance bond. Returns accumulate in the bond, but up to 5 per cent a year can be withdrawn as income. Tax is not payable on withdrawals until the bond is encashed.
However, UK insurance bonds can also offer 5 per cent income and, according to Paul Boni of independent financial advisers Berry, Birch & Noble: "They can be more attractive than their offshore equivalents. With onshore insurance bonds, tax is only paid on the difference between higher-rate and basic-rate tax, because the bond has been taxed internally throughout the investment term. Offshore bonds can suffer the full higher-rate of tax on encashment."
Although the panic is now on to keep investments as tax-efficient as possible, investors should consider whether they are actually prone to tax. Worrying about tax is a misplaced concern for many, as few breach the capital gains allowance limit, currently pounds 6,500 for the 1997/1998 financial year, at which this tax is payable.
By realising gains gradually over a period of years, most investors can ensure their investment profits remain under the taxable threshold. Couples can make the most of their tax allowances by allocating assets between them. Married couples have an advantage in that they can swap assets without it counting as a disposal for tax purposes. Income tax is harder to avoid. Consequently, many investors will want to think about keeping their PEPs and ISAs first and foremost for income-bearing investments.
Finally, Mr Boni warns that with markets at their current high peaks investors should be looking to consolidate the growth they have made so far, in case the market takes a dive. "I'd consider transferring to a protected investment such as the Legal & General's Growth & Protection PEP," he says. "It tracks four world stock markets and guarantees to return your original capital at the end of six years."
The author is editor of 'Personal Finance magazine'.Reuse content