THE government is expected to rake in at least £7 billion in extra taxes from individuals this year, and as usual most will come out of the pockets of ordinary, middle income families.

The Treasury is expected to raise £158 billion in the 2007-8 tax year from the three major taxes on individuals: income, inheritance and capital-gains tax. That’s an increase of 5% on the last financial year.

While this will have hit ordinary families hard, one group that is not too bothered by the tax increase is the very wealthy.

It has long been acknowledged that they often pay the least tax as a proportion of their overall wealth because they are more likely to seek advice about the cleverest ways to dodge it.

There is no reason why you can’t follow their lead and slash your own bill by hundreds or even thousands of pounds.

We have talked to the tax experts and asked them for the 10 tips they use for their wealthiest clients – but the rest of us don’t normally hear about.

1Giving to charity helps investments escape tax

Using a combination of insurance bonds and charitable gifts could mean you avoid higher-rate tax on your investments.

Insurance bonds are popular with higher-rate taxpayers because of the way they are taxed.

Investors are permitted to withdraw 5% a year of the original capital for 20 years without incurring a tax charge. When you cash in a bond, returns are treated as income, so higher-rate taxpayers pay 40% and those on the basic rate are liable for 20%.

In an onshore bond the insurer pays 20% before returns are paid out, so basic-rate taxpayers have nothing more to pay. Offshore bonds are taxed only when the individual sells. To keep your tax bill down it makes sense to ensure you are a basic-rate taxpayer in the year that you sell your bond, which is where gifts to charity come in.

You normally pay higher-rate tax on income of more than £39,825. But since you get income-tax relief on donations to charity, a £5,000 gift expands the higher-rate tax threshold to £44,825. If you earn £40,000 in income and have made a £50,000 gain on an investment bond, simply making a one-off gift to charity of £2,676 could cut £10,000 in tax – a saving of £7,324 after your contribution.

A contribution to a personal pension also raises the higher-rate threshold.

2 You can halve your tax in retirement

At retirement you are allowed to take 25% of your pension fund as tax-free cash. But if you invest that in a standard savings account or fund you will pay tax on any income it produces, so it’s not tax-free at all. If you put the money in an offshore bond you can withdraw 5% a year without paying tax, however.

The investments also grow tax-free until there is what is known as a “chargeable event” – when you cash the bond and bring the funds back into the UK or take out more than 5% a year.

Jason Hemmings at Alban-nach Financial Management, an adviser, recommends combining income drawdown, an alternative to buying an annuity at retirement, and offshore bonds.

That way even when you bring the funds into the UK, you keep tax to a minimum. With drawdown, your fund remains invested with the option of drawing an income each year, which you can stop at any time. If you have a £400,000 fund at retirement, he suggests you take £100,000 as tax-free cash and place it in an offshore bond. The remaining £300,000 is then placed in income drawdown, from which you take an income of £15,000 a year.

When the offshore bond has grown to £115,000 you reduce the drawdown income to nothing and surrender your bond. This is a chargeable event, but because you don’t have any other income in that tax year this is your only liability. You therefore pay basic-rate tax on the £15,000 gain at 20% – £1,732. Had you kept drawing the income from drawdown your tax bill would have been more than double that, at £4,732.

You restart taking drawdown payments in the following tax year and reinvest the £100,000 in a new offshore bond, repeating the process.

3 Pension income could be tax free

Another way to keep the Revenue at bay in retirement is to take your tax-free cash in instalments to provide an income, rather than drawing your pension which would be taxable. If you retire with a fund of £400,000 you are entitled to take £100,000 as tax-free cash. Rather than taking this all in one go you could take it in tax-free chunks, say £20,000 for five years.

4 No tax on profits from alternative investments

Wealthy investors have always been keen on buying wine, antiques and vintage cars, and the fact that any gains made are often tax free is part of the appeal.

If an asset has a predicted life of less than 50 years it is classed as a wasting asset and the profit you make on the sale is exempt from capital gains tax.

This takes the sale of certain antiques, such as long case clocks, and vintage or collectable cars outside the scope of CGT altogether.

Wine is sometimes – but not always – classed as a wasting asset. If the Revenue decides it will improve in quality and value after 50 years, the exemption may not apply. You also lose the exemption if it regards you as a trader running a business.

5 Your gardener could save you tax

If you run a business from home you can claim a proportion of the running costs of the house and offset it against your tax.

Mike Warburton at Grant Thornton, an accountant, said: “I have had cases where the client has been able to claim 50% of the cost of employing a gardener. They ran consultancies from home and so it was successfully argued that the success of the business depended on them keeping their gardens in trim.”

6 You can get 156% tax relief

You can put shares from employee-share schemes into a pension and reclaim an astonishing 156% in tax relief.

Share incentive plans allow you to buy company shares from your pretax salary using up to £1,500 or 10% of your income a year, whichever is lower.

Ignoring any increase in value, a £1,500 contribution costs a higher-rate taxpayer only £885 with income tax and National Insurance relief. After five years you can sell the shares free from CGT, then place the proceeds in a pension, claiming a second helping of tax relief on the contribution.

The government pays 22p for every 78p you invest in a pension, taking the total contribution to £1. So £1,500 is immediately boosted to £1,923.

Higher-rate payers get a further 18p via their tax return, or £346. So a contribution costing £885 is turned into £2,269 – a 156% uplift.

Employees in Save as you earn or Sharesave schemes can also benefit from double tax relief using this strategy.

7 You don’t have to wait 7 years for gifts to be tax free

Most people are aware that giving away assets during your lifetime is a legitimate way to take the sting out of death duty, but you have to wait seven years before most large gifts are exempt.

Payments made for the maintenance of family members, though, are immediately inheritance tax (IHT) free: you don’t have to rely on relief or exemption. That way you can cut a bill even if you have left it too late to do other planning. The exemption covers payments to spouses or civil partners, dependent children, including those at university, or a dependent relative – including the elderly needing care.

8 Businessmen can pay no inheritance tax on investments

If you run a business, it escapes inheritance tax (IHT) once you have owned it for two years as long as it is “wholly or mainly” involved in a trade.

You could put your investment portfolio into the business and still get the IHT exemption as long as it did not form more than half of the company. Only consider this if you do not want to sell your business in the future.

9 You do not have to pay IHT all at once

If you are faced with a huge IHT bill after a relative dies there is no need to panic. Many people don’t realise the tax related to land and buildings can be paid in up to 10 equal yearly instalments.

Matt Coward at Blick Rothen-berg, said: “Beneficiaries don’t need to show hardship, you just opt in to the instalment option. The IHT has to be eventually paid, and interest is charged on the outstanding amount of tax, but it is a way to keep payments at a manageable level.”

10 More than £15,000 of profits could be tax free

If you sell personal belongings, known as chattels, for less than £6,000 any profit is tax-free and does not eat into your annual capital gains tax allowance – £9,200 this year. Chattels include books, furniture, old coins, clocks, watches, silverware and ceramics.

Even cars, lorries and motorcycles are included if they are bought as an investment. The sale of private vehicles is always exempt from CGT. If a chattel is sold for more than £6,000, you either pay tax on five thirds of the amount over the limit or the actual gain if it is smaller.

Imagine you sold an antique mirror for £13,200. It would be £7,200 over the chattel allowance of £6,000 which, multiplied by five-thirds, would give a liability of £12,000. Alternatively, the gain is the amount you sold the mirror for, after deducting what you paid for it.

If it cost you £700 and you sold it for £13,200, that would be £12,500. In this case you would enter the lower figure, £12,000, on your self-assess-ment form and pay tax on that amount. You can still use your CGT allowance so if you can deduct £9,200 the taxable gain will be £2,800.

CLASSIC CARS EVADE THE REVENUE

ADRIAN BOULDING was delighted when he recently sold his vintage Daimler and didn’t have to pay any capital gains tax on the profit.

Boulding, 48, who lives in Cheam, Surrey, is wealth policy director at Legal & General, and a car enthusiast – he currently has two Jaguars in his collection.

He benefited from the rule that any profits made selling vintage cars are usually exempt from capital gains tax because they are classed as a ‘wasting asset’.

The exemption also applies to many antiques and wine. This is because they are perceived by the taxman to have a limited life of less than 50 years.

Despite this, Boulding said that vintage cars can go on for much longer than 50 years and continue to rise in value.

He said: ‘I love my classic cars and one of the benefits of the tax regime is that I don’t have to worry about being landed with a hefty bill.’