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Take it to the max

SPECIAL REPORT: SAVINGS AND INVESTMENTS. Sarah Anderson, a solicitor in tax and pensions at Bond Pearce, looks at the tax benefits of investing in Isas, National Savings and wine.

It is nearly the end of the tax year but there is still time to maximise on tax-free personal savings and investments.

First, are we all making the most of personal tax allowances? Everybody gets tax-free income of £5,225 (£7,550 if you are aged 65-74) in the 2006/07 tax year so if your spouse is paying a lower rate of tax than you, you can put savings into his or her name and reduce your tax bill.

In terms of capital gains tax, you get an annual allowance of £8,800 this tax year so if you have invested in assets which are subject to CGT rather than income tax, you can take those gains tax-free.

Assuming you have taken account of those points, the best-known tax-efficient investment opportunities are Isas. You can save or invest up to £7,000 a year in an Isa tax-free. There are two types of Isa – maxi and mini, although the distinction is being ended after this tax year.

Maxi Isas can contain cash, investment-based life insurance or stocks and shares. You can invest up to £3,000 in cash in a maxi Isa, with the remainder invested in shares, or the full £7,000 can be invested in stocks and shares.

Mini Isas allow you to divide your money so that up to £3,000 can go into a mini cash Isa and £4,000 can go into into a mini stocks and shares Isa.

With cash Isas, interest is tax-free and is usually paid at a higher than ordinary savings accounts. If you are a higher-rate taxpayer, you would normally pay 40 per cent on the interest while a lower-rate taxpayer would pay 20 per cent so this represents a considerable saving. You can take money out at any time and there is usually a minimum savings rate of just £1.

Dividend income from a stocks and shares Isa is subject to a “tax credit”. If you are a lower-rate taxpayer, your standard 10 per cent tax is taken as a tax credit before you get the dividend and that cannot be refunded for Isa investments. For a higher-rate taxpayer, where the tax on dividends is 32.5 per cent, you still cannot get back the 10 per cent tax credit element but there is still a tax saving of 22.5 per cent on the dividends.

In addition, any capital gains you make from Isas (over the current £8,800 annual allowance) will be free of CGT. If you want to invest in an Isa, you must be (generally) a UK resident and over 16 (for a cash Isa) or over 18 (for a stocks and shares Isa). Perhaps the best thing about Isas is you do not have to include them on a tax return.

If you have already used up your Isa allowance, there are other ways to invest and save tax-efficiently.

National Savings & Investment certificates are one option. If you want security, this investment may be appealing as these are government-backed. There are two types of certificate – index-linked and fixed interest – and you can invest £100-£15,000 in each issue of certificates tax-free. There are usually several new issues each year. Index-linked certificates are linked to the retail price index and provide guaranteed interest rates on top of that for the length of the investment term which can be three or five years.

Fixed-interest savings certificates are lumpsum investments that earn a guaranteed rate of interest over the investment term, which can be two or five years.

All returns on NS&I certificates are tax-free and anyone over seven can invest or you can invest on behalf of under-sevens.

You may also want to consider tax-free friendly society plans. Friendly societies offer savings plans for investments in funds which are free of income and capital gains tax. However, you cannot invest more than £25 a month and the minimum savings period is 10 years.

If you are looking for something a little different to invest in, there is the option of fine wines.

The good news is that any gains you make on investment in fine wine are free of capital gains tax.

The bad news is that investing in wine is a fairly high-risk strategy but if you make a loss, at least you can drown your sorrows with your investment.

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