More than £2bn of losses crystallised on investments were offset against capital gains to lower UK-based investors’ personal tax bills in the 2020-21 tax year — a rise of 27 per cent from the previous 12 months, according to data disclosed this week.
While figures are not available for the year ending April 2022, as investors have until January 2023 to file their tax returns, precipitous falls in cryptocurrencies and global equities suggest that investors will have even larger losses at their disposal to offset potential capital gains tax liabilities.
Conventional wisdom says that it’s often a bad time to sell investments after markets have fallen. However, financial advisers say that realising losses can prove a “very useful” tax planning tool.
“Many investors get nervous when stock markets fall, but there are ways you can take advantage,” explained Sean McCann, chartered financial planner at NFU Mutual, which obtained the 2020-21 data from HM Revenue & Customs via a freedom of information request. “Investors currently sitting on capital losses can make use of these to reduce any future gains, without coming out of the market.”
For investors reporting losses, the amount is automatically deducted from any gains made in the same tax year. Capital gains tax can apply to profits made on the sale of a wide range of assets — from shares that are not held within a tax wrapper, to a property that’s not a main home and most personal possessions worth over £6,000, apart from a car.
Where gains are made in excess of the annual capital gains tax allowance, £12,300 for the current tax year, losses will help to lower capital gains tax liability.
“A planned realisation of a loss in such market conditions can prove to be very useful,” said Shaun Moore, tax and financial planning expert at investment firm Quilter.
If losses are greater than gains, they can be carried forward indefinitely (or until the legislation changes), provided they have been declared on a self- assessment tax return to HMRC within four years of the end of the tax year. Taxpayers who do not complete a self-assessment tax return can write to HMRC.
There are lots of nuances to the capital gains tax rules. Svenja Keller, financial coach and founder of SK Inspire, said that investors who crystallised a loss in an unquoted company (including enterprise investment schemes) can offset the loss against income, which is preferable as income tax rates are higher than capital gains tax.
Under the current rules, basic rate taxpayers pay 10 per cent capital gains tax on investment gains and 18 per cent on taxable property gains. Higher and additional rate taxpayers pay 20 per cent and 28 per cent respectively.
Also, taxpayers who can prove that an asset they own has “negligible value” can make a loss claim. Those could prove valuable for owners of collapsed cryptocurrencies, which also fall within the rules.
“Crypto markets have crashed recently so there may be a significant number of investors that may want to explore whether [offsetting losses against gains] is an option for them,” said Moore.
Investors selling an asset to realise a loss cannot buy it back for 30 days. However, Kay Ingram, a chartered financial planner, notes that savers could sell an asset and immediately buy it back within a tax exempt wrapper such as an individual savings account (Isa) or self invested personal pension (Sipp).
Alternatively, they could sell shares with a spouse or civil partner buying them back, or buy a similar investment which is not the same security.
Investors should note that while they could realise a loss by gifting assets such as shares or property that have fallen in value, they cannot claim against gains if they gift them to a “connected person” — such as a spouse, child or business partner.
Separately, inheritance tax liabilities can also be reduced, under certain circumstances, if losses are crystallised in a year after death. IHT is calculated based on the value of assets at the time of death and is normally payable within six months. In most cases it must be paid before probate can be granted and before the estate can be handed over to the beneficiaries.
If qualifying investments (such as funds or shares quoted on a stock market) passed on in an estate are then sold within at a lower value than the time of death and within 12 months, inheritance tax on any losses can be reclaimed.
“Our research shows nearly 10,000 reclaims for overpaid inheritance tax on qualifying investments have been made in the past six years,” McCann said.
“When stock markets fall, it’s crucial that families who have recently paid an inheritance tax bill check whether they are due a refund. HMRC will not give the refund automatically, it needs to be proactively claimed.”