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Capital gains v income tax

December 2009

Whatever the outcome of the Pre-Budget Report December 2009, there is likely to be a tax advantage in having wealth gains taxed as capital gains rather than income.

With the prospect of higher rates of income tax at 50% and the capital gains tax rate at 18% for 2009-10 it is evidently preferable to make hay while the sun shines – while the CGT rate is lower than income tax rates.

For instance:

• A number of banks are offering investments where the return is structured as capital and subject to capital gains tax rather than as income-bearing investments such as cash deposits.
• It may also be possible to replace traditional equity reward plans and discretionary cash bonus schemes with employee incentive plans that provide tax-efficient arrangements which align employee rewards to the commercial objectives of the business. In addition to the potential tax saving this also gives a possible national insurance saving.

Readers may be interested to note that the Pre-Budget Report released this month did not change the rates of capital gains tax which remain at 18%.