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It's high time to get tax efficient; Savers are under pressure with interest rates unlikely to be lifted from their record low for a long while yet. Ian Lowes gives advice on how to make your investments more efficient.

AS SAVERS and investors we are in difficult times. The Bank of England base rate remains at an all-time low of 0.5% with little prospect of being lifted this year, inflation though falling is eating away at our savings often at a faster rate than they are growing, and although stock markets are rising, they remain volatile and commentators are predicting that overall, returns could be modest over the next few years.

In this climate it makes sense, therefore, to make the most of the means at our disposal to reduce our investment costs and create efficient tax plans.

We are rapidly heading towards the end of the tax year, so it is vital that if you haven't made use of the tax allowances available to you in the 2011-2012 tax year, if you are able, that you do so before the April 5 deadline.

Let's start with some of the more obvious tax allowances. In the investment world, the run up to the end of the tax year is often called the 'ISA season' as it is typically the time many people invest to ensure they utilise their tax allowance.

This tax year you can invest up to pounds 10,680, either in a stocks and shares ISA or a combination of a stocks and shares and a cash ISA. The maximum you can invest in a cash ISA is pounds 5,340.

With deposit accounts often paying below inflation returns, many people are taking advantage of the rules that allow existing cash ISA accounts to be transferred into a new stocks & shares ISA. It is important when doing this that you consider how much risk you want to take in your investments.

A useful tool can be structured deposits and investments, which give returns based on the stocks and shares market, but which can provide protection of your capital investment as well.

Pensions are another tax efficient means to invest. Currently, for every pound you pay into your pension the Government gives you a pound in tax relief up to your personal tax band.

Relief at ordinary rate tax - 20% - goes direct into your pension, which in turn can help accumulate greater returns in the long term. Anyone paying higher or additional rate tax will need to claim back the excess allowance through his or her annual tax return.

Anyone working for an employer who contributes to the company pension scheme, either a set amount or matching employee contributions to a set percentage of salary for example, should seriously consider joining the scheme. Not to do so is throwing away free money from your employer and invariably reducing your potential income in later years.

You can receive tax relief up to 100% of your earnings or pounds 3,600, whichever is greater. The maximum that can be paid into a pension at present is pounds 50,000 a year and there is a lifetime limit for pension saving of pounds 1.8m (pounds 1.5m from next tax year), above which any money withdrawn will be taxed at 25% for income and 55% as cash.

There is speculation that in the Budget on March 21 the Chancellor will withdraw the higher rate tax allowance for pensions, or reduce the contribution limits. Considering making contributions before Budget Day, therefore, may prove to be a sensible strategy particularly as pensions can be topped up with any unused allowances from the past three years.

In this case, Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) investments are likely to be far more heavily promoted to higher rate earners as they provide income tax relief at 30%, as well as capital gains tax advantages.

A word of caution needs to be added here as these investments attract significantly greater risk and are often less liquid than mainstream investments such as ISAs. While providing tax breaks, experience shows that not all EISs and VCTs stand up as good investments, so careful selection is necessary and advice should be sought if you are in any doubts as to the suitability of any investment.

For married couples it often pays to think laterally. For anyone paying the higher rates of income tax, transferring investments to a lower-tax paying spouse can be very worthwhile. It also makes sense to consider using the various annual tax allowances, exemptions and reliefs relating to capital gains (currently pounds 10,600) and inheritance tax (IHT).

Many more people are falling into IHT territory simply because of house price rises over the past 10 years, while the level at which no IHT is paid (the nil-rate band) has been frozen at pounds 325,000 until 2015.

This makes it even more important for anyone looking to transfer wealth to the next generation to use their annual pounds 3,000 IHT exemption each year. If you did not use all or a proportion of it in the last tax year then the unused relief can be carried forward, making a maximum exempt gift of up to pounds 6,000 this year.

Gifts on marriage also have IHT exemption - up to pounds 5,000 from parent, pounds 2,500 from grandparents and pounds 1,000 in other marriage gifts.

Junior ISAs were launched in November 2011. These allow parents and grandparents and others to contribute a total of pounds 3,000 into a Junior ISA. From an adult tax perspective it allows parents to donate to their children each year without falling foul of the parental settlement rules (where investment income is taxed at the parent's highest marginal rate, rather than their child's).

However, as I have written in this column before, where a large sum is likely to be invested, investments in trust may be the better option as it allows parents to exercise more control over access to the funds at 18 and beyond.

With the Government keen to increase its tax take and tougher times ahead, individuals need to take steps to ensure that they optimise all their current tax allowances and exemptions.

But it is important that you do not invest simply to get tax relief. Ensuring your money goes into investments that are likely to be good in their own right is crucial or you could find the overall effect on your finances is negative.

A good independent financial adviser can help you in this respect, putting together a tax-efficient financial plan (working where relevant with accountants and solicitors) to ensure you make sound investments for your future.

Ian Lowes is managing director of Jesmond-based Lowes Financial Management


PURSE STRINGS Mervyn King, the Governor of the Bank of England, which has kept interest rates stuck at an all-time low
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Title Annotation:Business
Publication:The Journal (Newcastle, England)
Date:Mar 10, 2012
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