Can you get duty free investments?

Many people were drawn to Personal Equity Plans (PEPs) in the 1990s because of their tax-free status. In reality, the expression 'tax shelter' was a more appropriate description.

The exemption from capital gains tax only came into play if shares held in PEPs actually went up in value. The old Tax Exempt Special Savings Accounts (TESSAs) better fitted the tax-free bill since income from these accounts was not subject to tax.

Both PEPs and TESSAs have now been replaced by Individual Savings Accounts (ISAs) which offer a shelter for both cash and shares. Any old PEPs can be maintained, but not added to.

However, it is the ISA which is becoming the most common form of tax-free savings account.

ISA small print

The rules on what can be invested in an ISA are complex. The maximum which can be invested in any tax year is �7,000. Once you have invested up to your limit and you subsequently withdraw money you cannot simply put it back later in the year. However, you can choose between a mini and maxi ISA.

A mini ISA allows you to separately invest �3,000 in cash, �3,000 in shares and �1,000 in insurance products. If, however, you take the maxi route then you can plough your entire �7,000 into equities.

Tax free limits �7,000 in ISAs �10,000 in National Savings �30,000 in premium bonds �1,000 in children's bonus bonds

Any interest on your cash will be tax free, capital growth and income from equity investments held in an ISA will be free of tax and any benefits from approved life insurance policies will also accrue tax-free. Remember, of course, that equity values can go down as well as up.

National Savings

Tax-free income can also be generated through certain National Savings products. Its fixed interest and index linked savings certificates both offer tax-free income.

A maximum of �10,000 can be invested in each issue. Children's Bonus Bonds also offer tax-free income with a limit of �1,000 to be invested in each issue. The first �70 of interest generated from a National Savings' ordinary account is also tax-free and you will not need to reach the �10,000 maximum investment limit to reach that level.

The prizes from Premium Bonds are also tax-free and you can invest up to �30,000.

With all these products it is important to examine the returns on your investment and ensure that the tax-free status and lower risk factors compensate for inevitably lower interest rates.