Capital gains tax band...based on income or income+gain?

spikit_uk

Dear MoneySavingExperts,

I feel a bit silly having to ask this question, but some conflicting information has left me a bit confused and I would be very grateful if someone in the know could please clarify things for me. Thankyou in advance.

I'm in the very fortunate position of inheriting an estate, which has sold for higher than its probate value and I understand that the excess is therefore liable to capital gains tax. Does the capital gains tax rate that I pay (i.e. 18% vs 28%) depend solely on my salary income (which is in the higher rate bracket), or is it dependent on both salary and the capital gain?

I'm wondering if it's possible that reducing my salary (by taking unpaid leave or the like) may actually result in a greater net take-home result?

I appreciate that both the income tax and capital gains tax bands are marginal and that both have tax-free allowances.

Kind regards and thanks again in advance

CLAPTON

spikit_uk wrote: »

Dear MoneySavingExperts,

I feel a bit silly having to ask this question, but some conflicting information has left me a bit confused and I would be very grateful if someone in the know could please clarify things for me. Thankyou in advance.

I'm in the very fortunate position of inheriting an estate, which has sold for higher than its probate value and I understand that the excess is therefore liable to capital gains tax. Does the capital gains tax rate that I pay (i.e. 18% vs 28%) depend solely on my salary income (which is in the higher rate bracket), or is it dependent on both salary and the capital gain?

I'm wondering if it's possible that reducing my salary (by taking unpaid leave or the like) may actually result in a greater net take-home result?

I appreciate that both the income tax and capital gains tax bands are marginal and that both have tax-free allowances.

Kind regards and thanks again in advance

you may be liable to IHT rather than cgt depending upon circumstances

but assuming you are paying cgt then it works like this

if you gain is say 50,000
and your taxable salary is 43,000

then you pay 28% on 50,000 -10,000 i.e 28% of 40,000

if your salary was less than the 40% tax rate you would pay some at 18% and some at 28%

so if you reduced your salary so that taxable pay was say 2000 less than the 40% band
you would pay 2000 at 18% and the other 3800 at 28%

spikit_uk

Thanks Clapton, much appreciated.

purdyoaten

spikit_uk wrote: »

Dear MoneySavingExperts,


I'm wondering if it's possible that reducing my salary (by taking unpaid leave or the like) may actually result in a greater net take-home result?

I appreciate that both the income tax and capital gains tax bands are marginal and that both have tax-free allowances.

Kind regards and thanks again in advance

You will have to explain this me!

How does giving up 100% of an income in order to save 10% tax (28-18) result in a greater net take home?

For example: You earn £41865 and give up £5000 salary to prevent CGT charged at 28% as opposed to 18%.

Before: Gross Pay £41865 less tax £6373 less NIC £4070 equals £31423 net. CGT on £5000 is £1400 leaving £3600. Total after tax £35023.

After: Gross Pay £36865 less tax £5373 less NIC £3470 equals £28023 net. CGT on £5000 is £900 leaving £4100. Total after tax £32123.


I make it that you would be £2900 worse off - bit like saying to your employer - Please don't give me that £1000 bonus as I would rather have nothing than £580 after tax!

SeniorSam

Depending on when the deatl occured, it may not be CGT, but the additional sum above the probate valuatuion, which needs to be notified to the Tax office. It may then depend on the deceased estate value if any tax is due.

When was the probate valuation date and the sale date?

Sam

somethingcorporate

You'd need to have a marginal tax rate greater than 100% to make your suggestion worth while

purdyoaten

somethingcorporate wrote: »

You'd need to have a marginal tax rate greater than 100% to make your suggestion worth while

Indeed. A neghbour had the ridiculous situation where any increase would have cost him 89.89% - so nearly there! (40% tax, 2% NIC and 47.89% child benefit) He has six children and earns £49900 per annum. One more child and he has more than 100% marginal rate!