Market falls are generally not welcomed by investors but they can provide an opportunity when it comes to tax planning. If you have shares or funds, and sell them following market falls at a loss, you can offset the loss against capital gains you make in the future, reducing your tax bill. The loss can be carried forward indefinitely and used against the sale of other investments such as shareholdings, property and other assets liable to capital gains tax (CGT).
Investors have an annual CGT allowance, currently £11,100. If you want to offset a gain in the same year as you made a loss, you need to balance this against your gain before you use your CGT allowance. If you carry forward losses you have to realise a gain that exceeds your annual CGT allowance before you can use the loss.
"So if you are going to realise losses it can be better not to make gains in the same year as you can carry forward your losses, but you cannot carry forward your annual CGT allowance," says Gary Heynes, head of private client at Baker Tilly.
When you have sold out of an investment at a loss if you reinvest in it within 30 days you cannot offset the loss, and if you wait that long to repurchase you could miss out on the asset going back up. You could immediately reinvest in an alternative asset but this may not always be appropriate.
However, you can repurchase the same share or fund in a tax-advantaged wrapper - for example, a self invested personal pension (Sipp). This could be particularly useful if you are over 55 and can access your pension, according to Gary Smith, financial planner at Tilney Bestinvest. You would also get tax relief going into the pension. You can also do this via an individual savings account (Isa) but you do not get the tax relief going in. In the jargon, these strategies are often called 'Bed and Sipp' or 'Bed and Isa'.
Bed and Sipp example You realise a loss on fund A of £10,000 and repurchase it via your pension. Your pension contribution is actually £12,500 because you get 20 per cent tax relief on the gross amount invested. "Therefore this is an effective uplift of 25 per cent on the net amount invested," says Mr Heynes. "The gross amount would need to fall by 20 per cent before a loss is incurred." Regardless of whether you are a basic, higher or additional rate taxpayer the only tax relief applied to the pension directly is the 20 per cent tax relief given. Higher rate and additional rate taxpayers could claim their additional 20 per cent and 25 per cent via their annual tax return and this would be received outside the pension. |
When you buy an asset back more cheaply after a market fall your base cost is lower, so if it rises back up your gain will be greater. But if you repurchase this via a tax free wrapper such as an Isa or Sipp you do not incur CGT, and you get to continue to hold it in your own name.
But with both Isas and Sipps the number of shares or units you buy back are likely to be slightly smaller due to dealing charges, any bid-offer spread, and in some cases stamp duty or the Panel of Takeovers and Mergers (PTM) levy.
If you are married an alternative solution could be where one spouse disposes of the shares or funds, realising a loss from the original purchase value, and the other spouse reacquires the shareholding. This is known as bed and spousing.
"This could also be another individual or entity, say children, a trust or investment company, that reacquires the shareholding," says Mr Heynes. "This might be a useful way to realise a capital loss while someone in the family retains ownership of the stock."
Shares bought and sold within Isas and Sipps are not subject to the 30-day rule but also do not benefit from the ability to offset a loss.
Mr Heynes adds that you should not just sell at loss for the sake of tax relief.
Lee Robertson, chief executive officer at Investment Quorum, advises you think about if the funds or shares you are considering selling at a loss are invested in sectors that are not doing well, if you want them, or if you are going to hold them for the medium to long term.
"There's no easy answer but just keep reviewing the portfolio, considering whether it is it fit for purpose and if there are things that you could be taking out," he says.
