Take Investment Losses for Tax Planning Gains?

Investment values have taken a severe downward knock in recent weeks following the Coronavirus outbreak and a slump in oil prices. Whilst we all hope that the markets will recover reasonably quickly, the timing of this is uncertain to say the least. In the meantime, however, there may be tax planning opportunities which could help investors make the most of their reduced-value investments. We cover some general ideas below:

Consider lifetime gifts

For those looking to pass on their wealth efficiently, gifting assets in the current climate could be a prudent move from both an Inheritance Tax (“IHT”) and a Capital Gains Tax (“CGT”) perspective.

For IHT, gifts to individuals are “Potentially Exempt Transfers” which will only become taxable should the donor not survive seven years from making the gift. Should the donor not make the seven years, IHT is assessed on the value of the asset at the date the gift was made, such that IHT exposure is essentially capped at today‘s relatively low value.

To give an example, let’s assume that Mrs Smith gifts a quoted shareholding to her son whilst the markets are struggling. The shares were worth £500,000 prior to the market fall but only worth £425,000 when the gift is made. Following the gift, Mrs Smith only survives two years. At the date of death, the shares have recovered to the pre-crash value of £500,000 but IHT is only assessed on the £425,000 value which was “frozen” at the date of gift. The IHT payable on the gift is £170,000 (ignoring any available allocation of tax-free allowances) as a result of Mrs Smith’s death but this would have been £200,000 had she died still holding the shares, so a £30,000 tax saving. Had Mrs Smith survived more than 3 years, the tax saving would have been even greater due to tapering provisions which come into play at that point.

From a CGT perspective, gifts of assets to connected persons, such as certain family members, are deemed to take place at market value at the date of transfer. The lower the value of the asset, the less CGT will be payable.

A word of caution though for CGT… if the value of the asset has fallen such that a capital loss arises on making the gift, the donor is likely to be severely restricted in how he can use this “clogged” loss.

Sell the investment on the open market

The lower the sale price, the lower the CGT. Maybe not a good reason in itself to sell up but what about losses?

Where the asset is sold at a loss, this loss is used against capital gains made in the same tax year (or carried forward to future years if none). This can be particularly useful where a gain has been realised, or is to be realised, on the disposal of a residential property. Such disposals are subject to higher rates of CGT (up to 28%) than other assets (up to 20%). Some investors may therefore look to realise losses as a means of reducing or completely extinguishing a CGT liability.

Realise losses in unquoted trading companies

Losses realised when disposing of shares in an unquoted trading company can be used against income rather than capital gains in some circumstances, saving tax at up to a rate of 45%. Even where the investment has not been disposed of but has become effectively worthless, a Negligible Value Claim can instead be made to obtain tax relief in the same way.

Find out more about our Private Client Tax team.

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