Cash Clinic: Boost your savings by making full use of personal allowances

Q: I HAVE recently inherited a sum of £45,000 and am now looking for the most tax-efficient ways of investing this money for the medium to long term. Can you please offer some advice as to the best options open to me?SR Paisley

A: Savings and investment products will generally be subject to either income tax or capital gains tax (CGT). In some instances, both forms of taxation will apply. However, you should take advantage of your income tax personal allowance (6,475 a year) and your annual CGT exemption of 10,100 a year to mitigate a potential tax liability.

In addition to the tax allowances, there are savings and investment products that are not subject to personal tax, namely individual savings accounts (Isas) and certain National Savings and Investments (NS&I) products.

Individuals looking to invest a lump sum should initially make use of the tax-efficiency offered by an Isa, into which you can either invest up to 5,100 a year in cash or 10,200 a year in stocks and shares. For a married couple, tax savings can be maximised by transferring the same amount to a spouse for them to utilise their annual Isa.

Where one chooses to invest in a stocks and shares Isa, it is important to note that the value can fluctuate and the value may rise as well as fall; there is no guarantee that the final value will be greater than the amount invested.

NS&I products are backed by HM Treasury, so they are government guaranteed. It has previously offered tax-efficient investment products such as fixed interest and index-linked savings, but these are currently not available, having been withdrawn last summer. Check the NS&I website - www.nsandi.com - for further information. NS&I does still offer a cash Isa, while the winnings on its Premium Bonds are also tax free.

In the event that your objective may be to save for retirement, you could also consider making pension contributions. It is important to note that contributions cannot exceed 3,600 a year (gross) or 100 per cent of your salary, but individuals do receive tax relief at their highest marginal rate of tax. Pension savings accrue in a tax-favoured environment and are used to provide you with a tax-free lump sum and a taxable income.

While the above is a very brief overview of tax-efficient ways of saving, you could also utilise your annual allowance as well as consider equalising your investments by transferring some to your spouse in the event of you being married.

The rationale is that both partners can use their allowances. If, for example, you had a portfolio of investments subject to CGT, you could realise 10,100 a year of gains tax free.If that portfolio is split between two of you, your spouse could replicate this and immediately you would have 20,200 a year of tax-free growth in addition to your Isa investments.

Where you are considering a lump-sum investment, I recommend that you seek independent financial advice.

• Christian Poziemski is a wealth manager at HBJ Gateley Wareing.