Money: Make sure the taxman doesn't get his hands on a slice of your cake

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The Independent Online
A new tax year brings a new tranche of tax allowances. This one also brings the possibility of a new government and tax changes in due course. So, can you still take sensible advantage of the variety of tax- efficient investments on offer to ensure that the taxman doesn't grab a share of your investment cake?

Well, if you are prepared to lock away your cash for five years, a Tessa is a "must-have". You can invest up to pounds 9,000 over the five years and any interest received is tax-free providing you don't withdraw more than (basically) the interest from the account. Interest rates vary among banks and building societies, but are usually good. While it does not protect against inflation in quite the same way as a good stock market investment, you won't lose it all on a Black Monday.

There are various types of tax-exempt National Savings Certificates: Fixed Issue Certificates offer a guaranteed tax-free compounded return if held for five years. Alternatively, Indexed Linked Certificates also need to be held for five years and the return is calculated by reference to a fixed percentage, plus inflation (as measured by the retail price index). This offers a bit of the best of both worlds - the security of a fixed investment, plus protection against inflation. There are also Yearly Plan Savings Certificates - good for higher-rate taxpayers aiming to build up a capital sum with a fixed rate of interest. You can currently invest pounds 10,000 in the fixed issue and a further pounds 10,000 in the indexed- linked one.

For the more adventurous there are riskier tax-efficient investments. Ex-Chancellor Nigel Lawson is back on TV screens drawing attention to the PEP regime he created. However, this should not be held against it as an investment. All the dividends, interest and capital gains produced by a PEP are tax-free and you do not have to hold the investment for any minimum length of time.

Investment in a PEP has some of the risks of a stock market investment, though corporate-bond PEPs offer immediately higher income and less volatility. You can invest up to pounds 9,000 - pounds 6,000 in a general PEP and pounds 3,000 in a single-company PEP.

It can also make a lot of sense to transfer any free building society conversion shares into a PEP to avoid tax charges later.

Adrenaline junkies have the Enterprise Investment Scheme (EIS) which offers substantial tax advantages to encourage investment in unquoted securities. Relief of 20 per cent on investments up to pounds 100,000 with CGT exemption on the disposal sounds almost too good to be true.

Drawbacks are the risks involved in investing in unquoted companies, that shares must be held for five years and the restrictions placed on the level of involvement in the company.

Venture Capital Trusts are similar - quoted companies holding 70-plus per cent of their investments in the type of unquoted companies that would basically qualify for EIS and up to 30 per cent in other investments. They offer similar tax advantages to the EIS but aim to diminish the risk.

Probably the most tax-efficient investment you can make is a pension. And while some would prefer to live their lives according to the "might be run over by a bus tomorrow" theory, population statistics suggest that buses are being driven more carefully these days.

Not only do you get a deduction for pension payments made into a personal pension fund, the tax-free lump sum on retirement is also free of tax. As your income is likely to drop on retirement you will also probably pay tax at a lower rate on the income you receive. It is generally not a high-risk investment in the cautious Nineties, whatever the spectre of the Maxwell saga may suggest.

Of course Premium Bonds and the National Lottery can be very tax-efficient investments - no tax on winnings. But unfortunately no relief on losses either. This illustrates a wider issue: you must look at the overall investment return and make sure it is competitive. Tax-free does not guarantee the best result.

John Whiting is a tax partner at Price Waterhouse

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