Personal Finance: The insiders' guide to tax efficiency

Five people in the know reveal how you can reduce the bill. By Iain Morse

HANDING OVER money to the taxman is hardly the most pleasant of tasks. You would think most of us would do anything legitimate in order not to pay more tax to the Inland Revenue than we need to.

In fact, surveys regularly reveal that many of us pay more tax than necessary, mainly because of a combination of ignorance and laziness.

We asked five insiders in the world of finance (an accountant, an independent financial adviser, a fund manager, a stockbroker and a retired private investor) how they manage to reduce their own tax bills.

All five agree that there are plenty of ways to save tax if you can be bothered to use them. They warn, however, that tax planning is not just about saving tax but having a financial plan that fits in with your long- term objectives. There is no point in saving a couple of hundred pounds a year if your investments lose you money.

Here is our panel's advice

Nathan Parnaby, fund manager at Standard Life: "Start by marrying an accountant, as I have - you get all your tax advice for free. More seriously, don't make any financial decisions and never invest only for a tax break. Make sure that whatever you do is part of a wider financial plan.

"My wife and I don't keep much in cash.We believe in the long-term benefits of equity investment. I save into PEPs every month, have done for years, and invest in UK trusts (Standard Life's, of course) as they give excellent long-term value. Avoid lump-sum investment unless markets have just fallen - right now is a good time.

"Build up your pension provision. I'm in my employer's scheme and supplement this with additional voluntary contributions (AVCs). Every bit of pension provision counts. And it gets generous tax reliefs."

Bryan Johnstone, stockbroker at Bell, Lawrie, White: "Only use tax breaks that add value to your investments. Now that husbands and wives are taxed separately, you can switch any investments to the spouse paying a lower marginal rate of income tax, or no tax at all. That's money saved at once, particularly on cash deposits.

"I also measure capital gains on my share portfolio. My wife and I switch investments to make full use of our respective annual capital gains tax allowances. Very often people don't.

"When it comes to pensions, I prefer `self-invested personal pensions' (SIPPs). Not for everyone, these still offer a wider range of investment opportunities than `off-the-peg' plans.

"I'll also be looking at venture capital trusts (VCTs). These can be risky, but allow you to roll over a capital gains tax liability."

Janice Thomson, independent financial adviser and managing director at Chelsea Financial Services: "I cover my mortgage in two ways: my husband and I both have PEPs, investing the full pounds 500 per month. PEPs are exempt from capital gains tax, which is important if you cash in a lot of investments at once. Secondly, we have two endowments - still a very good option if kept to the full term, with proceeds maturing tax free.

"Outside of PEPs, I invest in unit trusts with very little dividend income and change these to crystallise capital gains, taking up my pounds 6,800 annual allowance. The CGT allowance is under-used for tax saving.

"Last of all, I invest for each of my three children in growth unit trusts and in friendly society children's bonds. Some pay excellent returns. Remember, this can be a way of defraying a possible inheritance liability."

Kevin Offer, chartered accountant at tax consultants JF Chown: "Over the last 20 years, many loopholes have been closed. So I would advise tax-payers to look at standard tax allowances. It's surprising how few use these to maximum advantage.

"This year I'm looking at PEPs and Tessas, both to be replaced by the Individual Savings Account (ISA). Existing PEPs will be left in force, while Tessas will be allowed to run their five-year term. ISAs will have lower contribution limits so one attraction of starting a Tessa is that at maturity, the capital invested into it can then be transferred into an ISA on top of the account's annual contribution limits.

"Reliefs on venture capital trusts (VCTs) are good, too. There are four sets of relief, including roll-over of capital gains, 20 per cent income tax relief on the amount invested, tax-free dividends and capital growth."

Edward Murray, private investor: "I draw a pension, quite a good one, though it leaves me just in the lower tax bracket. My wife only has the state pension so I've switched as many of our investments into her name as possible, thereby avoiding having to pay any higher rate income tax.

"I've never liked PEPs - the charges are too high. Instead, I use my capital gains tax allowance every year to realise gains which become `income'. In other words, I spend them. This, in my view, is the cheapest way of managing a portfolio.

"Finally, we've written our wills to take advantage of our respective nil-rate bands - the amount you can give away free of inheritance tax to anyone other than your wife (all transfers between spouses are tax- free). This means each of us will give up to pounds 154,000 to our children, reducing any possible tax bill when the Grim Reaper calls."