Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166 Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166 Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166 Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166
Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166 Deprecated: mysql_connect(): The mysql extension is deprecated and will be removed in the future: use mysqli or PDO instead in /home/sites/westwaters.co.uk/public_html/framework/lib/sddb.class.php on line 166Even though the top rate of Capital Gains Tax was raised to 28% a couple of years ago, this is preferable to paying income tax at up to 50%. What are your options for converting income into capital gains and taking advantage of the tax rate differential?
Income into gains
As a higher rate taxpayer you will lose up to 50% (45% from April 2013) of your income to the Taxman. But capital gains you make are subject to tax at just 28%, 18% or even 10%. So if you could swap income for gains that might save you a tidy sum. Here's a few ideas on how to do just that.
Using unit trusts
These are similar to investment bonds except that you own shares (units) in an overall fund. Some of these are set up by unit trust managers to produce low income and high capital growth. As the value grows you can sell some units each year and the growth in value (gain) is liable to CGT. This means you still get an annual income, but are subject to the lower CGT rates.
Tip. Unit trusts do pay dividends and these will still be chargeable to income tax. So speak to an investment advisor before choosing a fund to invest in. Aim for low income, high growth.
Your own investment company
Holding investments within your own personal company used to be quite popular and may now become so again. The idea works like this: you set up a company and buy shares in it with cash. This money is used to make investments in the normal way. Any interest etc. the company receives is charged to Corporation Tax (CT) at the main rate. From April this will be 23%. The net income stays in the company until you want to take it all out. You then wind the company up and liquidate it. The money you get out of it will be chargeable at 28% CGT. So the net tax cost is 44.5%, but after knocking off your annual exemption for CGT, around £11,000, you can reduce to as low as 0%.
Example. For every £1,000 income the company receives, CT will be 23%, leaving £77 in the coffers. When the company is liquidated the £77 is distributed as capital and subject to CGT at 28%. That leaves £55.44 for you.
Trap. There are additional costs to running a company compared to owning investments directly. These include statutory fees payable to Companies House, and the costs of preparing annual accounts and tax returns, unless you prepare them yourself. In all, these are likely to come to several hundred pounds per year. So you must factor these in against any tax savings.
Property
Property investment has been less popular in recent years. But we're now seeing house prices increase, although it's still a risky market. If you're prepared to take that risk, the tax savings can be worth it.
Example. A gain of £30,000 on a property would be liable to CGT of up to £8,400 but could be less if you have your annual CGT exemption to set against it. The same amount of interest would be subject to a tax charge of up to £13,500. The tax saving might just make the risk worthwhile.
If you need any more information on tax issues, please get in touch with us on 0191 386 4786 or by emailing information@westwaters.com
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