August 28 2022, The Sunday Times - Imogen Tew
Investment losses are never enjoyable, and as markets have had their worst start to the year since 1970, savers are likely to have suffered badly.
The S&P 500, the index of the biggest American companies, is down 7.7 per cent since April 6, the start of the tax year, while the UK’s FTSE 350 index has lost 2.4 per cent. Some single stocks have fared far worse: Netflix is down 38.6 per cent so far this tax year, Amazon is down 15.4 per cent and easyJet is down 30 per cent.
It is rarely a good idea to sell investments after markets have fallen as you crystallise a loss. In the vast majority of cases, it pays to stay invested — but if you have to take a hit, those losses could be used for smart tax planning.
“Falls in the market can present opportunities for tax planning to reduce tax on future gains,” said Sean McCann from the insurer NFU Mutual. “If you have shares or investments that have reduced in value since you bought them, you may want to take advice on how best to utilise those losses to reduce future capital gains tax bills.”
What is capital gains tax?
This is the tax on profits made when you sell an asset that has increased in value. You also pay when you gift an asset, trade it for another asset or get compensation based on its value.
You pay CGT on most personal possessions worth £6,000 or more (excluding your car), any property other than your residential home, and shares that are not in a tax-free wrapper such as an Isa or pension.
You can make up to £12,300 of profit tax-free each year, and anything above that is taxed. If you are a basic-rate taxpayer, the tax is levied at 10 per cent, or 18 per cent on a residential property that is not your main home, while higher-rate taxpayers pay 20 per cent, or 28 per cent on a residential property.
But it works the other way too. If you report a loss, the amount is deducted from the gains you made in the same tax year, and you can carry forward unused losses from previous tax years.
How do you report losses?
You can claim for a loss on your tax return. If you do not typically fill out a self-assessment form, write to HM Revenue & Customs.
You can claim up to four years after the end of the tax year in which you sold the asset. Once reported, the losses can be offset against future gains indefinitely.
In the 2020-21 tax year 55,000 investors offset losses against gains, according to a Freedom of Information request submitted by the insurance firm NFU Mutual. The average loss was £37,000 and the total was £2 billion — 27 per cent up on the year before. It is likely to be higher for 2021-22 because many investors had hefty losses.
Say you are a basic-rate taxpayer who sold a residential property that was not your main home for a £15,000 profit. That is £2,700 above the tax-free allowance, so you would pay 18 per cent on the excess: £486.
But if you also sold five Netflix shares at last week’s price of $231.59 (£196.56 according to the exchange rate at the time), having bought them in July 2020 when they were $548.73 (£415.38), you would have lost £1,094.10. You could claim that loss against your capital gains, which would lower your bill to about £289.
Can I sell, report the loss and then rebuy?
The short answer is no. If you sold shares in a company and bought them back within 30 days, you cannot claim it as a loss.
You also cannot claim against gains if the loss results from gifting or selling an asset to a spouse or civil partner, or any other “connected person” in the eyes of HMRC — such as family or business partners. The exception is if you are claiming against a gain made by gifting or selling an asset to the same connected person.
There are ways to trigger a loss and stay in the market. One way is to sell a share you hold in a general investment account, and buy it back immediately within an Isa or a pension, according to NFU Mutual. You can offset the loss against your CGT bill, but you will not lose any time in the market so there is no risk of missing any bounceback.
Another way is known as “bed and spousing”: you sell the shares and your partner immediately buys them back, letting you realise the loss without an extended period of not owning the share.
If these are not options for you, you could sell shares and buy a similar investment. For example, if you sell a tech stock, you could buy into another tech company that is likely to perform in a similar way if there is a bounce back.
Can you claim for losses for inheritance tax?
Yes. Inheritance tax is paid on the value of an estate at the date of death, but assets are often not sold until far later.
If there is a stock market crash in the interim, you can claim through inheritance tax share loss relief. It applies to listed stocks and shares as well as some investment funds and UK gilts, if the assets are sold at a loss within 12 months of the date of death. You cannot buy the same shares within two months.
You can also claim on a property, but usually only if the sale is made by the executors of the estate and not to a beneficiary or relative. The loss must be more than £1,000 or 5 per cent of the date-of-death valuation. You can claim if the property is sold within four years.
Be aware - the relief applies to the net loss, so you must list every investment sold, not just those sold at a loss.
Investment Synergy - Losses and gains are all part of the ups and downs of investing, particularly when the strategy is more short term and liquidity rather than the long game ......
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