Although the deadline for making the most of last year's tax allowances (5 April) has come and gone, this does not mean the possibilities for financial planning have now been exhausted.
If you have surplus cash left over after investing your £7,000 individual savings account (ISA) allowance during the past tax year, you should consider the most tax-efficient way of investing this money now - rather than leaving it to the end of this tax year in April 2005. This way, not only will you spare yourself the last-minute rush of both choosing an investment and filling in the application form, your money will have more time in which to grow.
The most obvious first step is to ensure you use up your ISA allocation for this financial year. All returns on individual savings accounts are free of both income tax and capital gains tax (CGT). And remember that you won't have an opportunity like this for much longer: from April 2006, the tax-free allowances are being cut from £7,000 to £5,000 for stocks and shares ISAs, and from £3,000 to £1,000 for mini cash ISAs.
If you've still got cash to spare after allocating your full ISA allowance, there are a few tax-efficient ways of investing this. Adrian Shandley, managing director of independent financial adviser (IFA) Premier Wealth Management, says you should not be afraid of putting money in non-ISA unit trusts and open-ended investment companies (Oeics).
"If you invest in equity or equity income funds, there is now very little difference between investing through an ISA or straight into unit trusts," says Mr Shandley. This is because the 10 per cent dividend tax credit on equity ISAs has now been abolished.
In theory, this should make equity funds and shares held within ISAs less attractive than bond funds. While the Government has reduced the dividend tax credit on equities first from 20 to 10 per cent and now to zero, bond funds still enjoy a 20 per cent credit. Many financial advisers suggest you therefore use your ISA allow- ance to invest in the corporate bond element of your portfolio.
Mr Shandley argues that you are unlikely to exceed your CGT allowance, which has been increased by £300 for the new tax year to £8,200 annually.
To benefit most from tax-free gains, Mr Shandley recommends premium bonds: you don't earn interest on the investment but winnings are free of CGT and you can get your hands on your cash at any time. "These are appropriate for the self-employed who have money set aside for the taxman, don't want to risk this cash and need to access it in January," he adds.
From 6 April, the amount of income tax relief you can claim on venture capital trusts (VCTs), and how much you can invest in them, have doubled to 40 per cent and £200,000 respectively. Gains are also free from CGT. VCTs, however, are not low-risk or short-term investments as they don't back big companies with proven track records. Instead, they put money into start-up or unquoted firms, or those listed on the Alternative Investment Market (AIM). To gain tax relief, VCTs must be held for at least three years, and you should remember that it will be a number of years before the trust can realise profits through the trade sale or flotation of these companies. That said, investors also have the chance to be there at the start of a potential success story.
Amanda Davidson, a partner at IFA Charcol Holden Meehan, says: "For people with significant amounts of money in traditional pension plans and with-profits schemes, investing in a VCT is one way to diversify and balance their portfolios. Although the risk is higher, so too is the potential reward."
If you fancy a more glamorous punt, this is the last tax year in which you can take advantage of sale and leaseback schemes that back British films under legislation known as Section 48. With these schemes, you receive a tax deduction in the first year of your investment, which you then have 15 years to pay back to the Inland Revenue.
In effect, this enables you to defer tax. If a top-rate taxpayer invests £100,000, he saves £40,000 in the first year.
But Ms Davidson warns: "Film partnerships are potentially a high-risk investment and therefore are only suited to certain types of investor."
Another tax-efficient vehicle is the offshore bond. If you invest in this, you do not pay income tax or CGT until you withdraw your money. This allows funds within a bond to grow virtually free of tax and to benefit from reinvestment of proceeds that would otherwise be taxed. You can also take an annual 5 per cent income.
When you cash in your bond, your capital gains and income will be taxed, but you can reduce this bill through good timing. For example, top-rate taxpayers will be in a lower tax band when they retire from work, so if they withdraw the money from the bond then, they will pay less to the Inland Revenue.
The same principle works if you plan to move abroad in the future, at which point you can cash the bond in and probably pay less tax. The other advantage is that if you switch between funds within an offshore bond, you do not pay CGT on profits. This is only triggered when you withdraw money.
You should, though, check the charges on offshore bonds: they can be more expensive than their onshore counterparts.Reuse content