While none of us want to see the value of our investments reduce, the recent falls in equity markets could provide Inheritance Tax and Capital Gains opportunities.
Reclaim Inheritance Tax
Inheritance Tax 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 the assets can be handed over to the family.
If the executor sells any qualifying investments including shares quoted on the stock market, unit trusts and OEICs (Open Ended Investment Company) within 12 months of the death at a lower price, they can reclaim the Inheritance Tax paid on the loss of value.
The sale and the reclaim must be made by the 'appropriate person’ who is normally the executor of the will. If the investment is passed on to family members who then sell, the reclaim isn’t available.
There are other traps to look out for. All the investments sold by the executor are aggregated. If some of them have increased in value, this will reduce the amount of Inheritance Tax that can be reclaimed.
One option open to executors is to pass those investments that have increased in value direct to family members and only sell the investments that have fallen in value to maximise the amount that can be reclaimed.
There’s a similar relief available on houses sold at a lower value within four years of death, if house prices begin to fall it’s important to be aware, as rebates aren’t given automatically and need to be claimed.
One of the most effective ways to reduce Inheritance Tax is to make gifts. The value of the gift is frozen at the date it is made. Any future growth is outside the estate and if death occurs within seven years won’t be taxable.
The recent falls in the market may provide an opportunity for those wanting to make gifts, either directly or into trust. In the event of a recovery in values, all the growth will be free of Inheritance Tax.
Stay in the market and reduce future Capital Gains Tax bills
Investors currently holding investments worth less than they paid for them due to share price falls, may be able to make use of these losses to reduce tax on any future gains, without coming out of the market
In order to create a loss on shares, unit trusts or OEICs an investor would need to sell part or all of their investment at a lower price than they paid for it. But selling also means they risk missing out on any potential recovery.
The obvious answer would be to sell the shares and immediately buy them back again. Unfortunately, HMRC rules mean that selling shares and buying the same ones back within 30 days doesn’t create a loss for tax purposes.
There are several ways of creating a loss and staying in the market without falling foul of the 30-day rule. These include selling shares or a holding in a fund and then buying them back into your ISA or pension, buying a different but similar fund or share or alternatively, to keep them in the family - your spouse or civil partner could choose to buy them back.
Losses can be used to reduce future Capital Gains Tax bills. For example, someone selling a buy to let property making a gain of £30,000 who choses to realise a £40,000 loss by selling some shares in the same tax year would pay no tax on the gain from the buy to let property and could carry forward a £10,000 loss to use in future years.
Any losses in the current tax year are set against gains in the same tax year, which can mean the annual £12,300 exemption is lost. Losses carried forward from previous years can be used to reduce the gain to a level that allows the tax-free exemption to be used in full.
The falls we’ve seen in the markets give the opportunity to create losses that can help reduce tax bills on any future gains from investments. It’s important to get advice before taking any action.
Inheritance Tax can be complex however careful planning can help reduce the amount payable. An NFU Mutual Financial Adviser can help put a plan in place. Please note our Financial Advisers are limited in the Capital Gains Tax advice they can provide.
Either call us on 0800 622 323 or complete an enquiry form, we'll then contact you and put you in touch with your local NFU Mutual Financial Adviser.