Types of tax-free investment

There are a number of ways investors can reduce their tax liability. Here are the most popular:

• Cash Mini ISAs
These are basically ordinary saving accounts but the interest you accumulate is free from tax.
Anyone over 16 can put up to £3000 per tax year into a cash mini Isa. The good news is that from April 2008 you would be able to place up to £3600 each year in a mini cash Isa.

• Share ISAs
These are accounts in which you can hold stock market-type investments such as shares. The money grows free of capital gains and income tax. Higher rate taxpayers also avoid paying extra tax on dividends payments from shares, and they don’t have to declare their Isas on their tax returns.

There are two types of shares Isas – maxis and minis. For the 2007/08 year you may invest £7,000 in a maxi equity Isa. If you have a cash mini Isa you may also invest £4,000 in a mini equity Isa.

For 2008/09, the overall limit increases to £7,200. So if you have used the new maximum cash mini Isa allowance of £3,600, the maximum you may place in a stocks and shares Isa is £3,600, bringing your total Isa investment to £7,200.

• Venture capital trusts
VCTs have traditionally offered one of the best tax breaks available, although they have recently lost their shine as tax breaks were cut and extra restrictions imposed.
VCTs are high risk – they are effectively companies quoted on the stock exchange which invest mainly in unquoted companies or ‘start-ups’.
At the time of writing, investors were entitled to 30% income tax relief. It means that every £10,000 you invest will only cost you £7,000 because of the tax break. There is no income tax to pay on any dividends, nor capital gains tax to pay on the increase in your stake in the trust.
To check these figures are up to date and for current rules about tax breaks offered to investors in VCTs visit the HMRC website at http://www.hmrc.gov.uk/guidance/vct.htm.

• Offshore investing
Investing offshore provides opportunities for tax suspension, reduction and avoidance.
The attraction is ‘gross roll-up’. This means assets can grow without being taxed and could therefore outperform investments at home. However, gains or income are liable to tax in Britain when they are brought back to the UK. You will also need to pay tax of another country if you take the money there.
The trick is to take into account how long you are going to be away if you are emigrating, your residency for tax purposes, your will, property and more liquid assets such as savings.
Always seek professional advice from a tax company like Taxfile with offices in South London when it comes to ways of minimizing your tax liability.