In March 2020 stock markets around the world crashed in response to coronavirus. Whilst most investors will understandably view this as bad news, it has created some tax planning opportunities. How can you take advantage?
Giving assets away
Giving away assets such as listed shares during your lifetime to your adult children or grandchildren is a common way to save inheritance tax (IHT) while still keeping the assets in the family. This is because the gift is treated as a potentially exempt transfer for IHT purposes. This means that provided you survive seven years after making the gift, the value will be excluded from your estate for IHT purposes.
Trap. Unlike transfers to spouses, which are free of capital gains tax (CGT), any shares you hand to your children are taxed as if you sold them at market value (broadly, the amount a third party would pay for them). The taxable gain is the difference between the market value and their original cost. This means that you might have to pay CGT out of proceeds you didn’t actually receive. Note. You will only pay CGT if the total of all your gains is greater that the annual CGT exemption, which is £12,300 for 2020/21.
CGT saving
The dramatic fall in the stock market in March 2020 means that you’re likely to have seen a significant drop in the value of your listed share portfolio.
Tip. Therefore, now might be a good time to pass your shares on to the next generation as you’ll be liable to CGT on a smaller gain or, if the value of the shares is now less than what they cost you, no gain at all.
Example. You bought 10,000 shares in Barratt Developments Plc in December 2018 when they were £4.50 per share, so the total cost was £45,000. In February 2020 their value peaked at £8.78 per share, so the total value was £87,800. If you had transferred the shares to your children on that day, the gain would have been £42,800 so you would have had to stump up CGT of £6,100 ((£42,800 – £12,300) x 20%) assuming you’re a higher rate taxpayer.
However, on 3 April 2020, the share value had fallen to £3.84 a share which is below the £4.50 you paid for them so there will be no CGT to pay. The transfer will in fact create a capital loss.
Tip. Even if you make a capital loss on the gift, you need to report it on your self-assessment tax return otherwise it can’t be deducted from gains you make in the same tax year or, where it exceeds these, carried forward to reduce gains (in excess of the CGT annual exemption) in future tax years.
IHT savings
If you don’t survive seven years after making the gift of shares, their value will be taken into account when calculating the IHT payable on your estate when you gave them away not their value on the date of death.
Tip 1. Give away shares when the stock market is lower to reduce the potential IHT bill for your beneficiaries.
Tip 2. If IHT has already been paid on an estate which included listed shares and, due to the stock market fall the shares have been sold within one year of death at a value less than they had for probate, ask the executors to recalculate the IHT bill using the value they were sold for ( yr.16, iss.3, pg.6 , see The next step ).
If your share portfolio value has fallen significantly, now could be a good time to pass on some of the investments to your adult children to save capital gains tax on the transfer. There could also be an inheritance tax saving if you die within seven years of making the transfer.