Special schemes to help you stash your cash

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In The 1970s, when the top rate of tax on unearned income was a whopping 98 per cent, every accountant had his or her favourite tax dodging scheme. Stricter anti-avoidance laws and lower tax rates have since killed off the market for esoteric tax planning, but there are still plenty of legitimate options for wealthy individuals who want to reduce the tax paid on investments.

Once you have exploited simple tax-efficient investments such as PEPs and Tessas and topped-up your pension as far as possible, the next step could be a move offshore. Investments in unit trusts based in offshore havens such as the Channel Islands are only liable to tax when they are cashed in. If a future Labour government cranks up tax rates, the money can be left offshore until they come back down again.

If you decide to keep your money in the UK there are several options, but you need to consider the varying levels of risk.

Some of your cash can be be stashed in an Enterprise Investment Scheme, which gives tax breaks to investors because it helps new companies raise money. If you buy company shares via an EIS, you do not have to pay any capital gains tax if you hang on to them for at least five years. There is also income tax relief at the 20 per cent lower rate on investments up to pounds 100,000. And if you make a loss on the deal you get relief against income or capital gains tax. Remember that companies that qualify for EIS investment are new and small, which means there is a lot of risk involved.

Venture Capital Trusts also aim to raise finance for small, often start- up, businesses. VCTs are publicly quoted companies that use their funds to invest in a spread of unquoted firms. VCT dividends are tax free and you do not pay capital gains tax when you sell your shares. Investors who buy new VCT shares get income tax relief at 20 per cent if they hold their shares for at least five years. As with EIS schemes, you need to be aware of the risk involved.

Investment in forestry used to be a favoured tax dodge because the cost of planting and maintaining the trees could be set against tax paid on other income. The Inland Revenue did away with that in 1988 but the proceeds from the sale of timber are still tax free. There is also some inheritance tax relief on forestry investment.

Vintage wines, rare stamps and even pop star memorabilia are other forms of investment that can produce large returns. There is usually no income tax to pay, as long as the Inland Revenue does not regard your investments as part of a business.

There could be capital gains tax to pay when you sell or give away your investment, but there is a pounds 6,300 exemption in the first year. Gains on antiques, jewellery and tangible movable objects are tax free if they are sold for less than pounds 6,000, unless they are part of a more costly set.

However, with a general election due next year it's worth remembering that tax rules change frequently and any investment made purely for tax reasons could turn into a liability.

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