Capital Gains Tax: Avoiding the 28% rate
In his Emergency Budget the Chancellor updated the rate of tax for capital gains, but not for
everyone. The new higher rate is linked to the level of your taxable income so does this mean
that an income tax deduction can save you Capital Gains Tax?  

Two-tier tax
The new 28% rate only applies to capital gains you make after Budget day, June 22 2010.
Up until then gains are taxable at 18%, after first deducting your annual exemption (£18,000). 
Even for post Budget gain, the 18% rate applies until the total of your income plus capital
gains exceed the basic rate band of £37,400. Anything above that will be taxed at the new rate.

An example
After deducting his annual tax-free allowance of £6,475 Steve's taxable income for 2010/11
is £38,000. He also made a gain of £25,500 from selling some shares in November 2010.
As Steve's income is greater than the basic rate band, the whole gain is taxable at 28%
resulting in a CGT bill of £4,312. But there's a way Steve can reduce this. Paying a personal
pension premium before April 6 2011 will reduce taxable income for 2010/11 and, as a
result, it  increases the amount of basic rate band that Steve can use when working out how
much capital gain tax should be taxed at 18% and how much should be taxed at 28%.      

If Steve made make a gross pension contribution before 5 April 2011 of £6,000 this would
extend his basic rate band by the same amount which can be used against his capital gain
of £25,500. His CGT bill is thus reduced to £3,772 a saving of £540. The income tax relief
on the pension contribution is unaffected. Steve will still get this as well as the CGT saving.  

Gift Aid contributions have exactly the same effect and the rules allow you to carry back
Gift Aid payments made in one year and treat them as if they were paid in the previous one.

For more information or specific advice about this please contact us on 01299 879140.