Use the market crash to slash family tax bills
FAMILIES could use the stock market crash and any dip in property prices as an opportunity to cut inheritance tax and capital gains tax bills.
A crash could reduce the value of key family assets such as pensions, Isas and property, and reduce the amount of tax owed to HM Revenue & Customs.
Some families could save tens of thousands of pounds, said Sean McCann, chartered financial planner at NFU Mutual: “Many of us get nervous when stock markets fall but there are ways to take advantage.”
Families could cut a capital gains tax bill by selling loss-making shares to offset any gains made this tax year. “Any excess loss can even be carried forward for use against capital gains in future years,” he said.
It has to be done carefully, though. Selling shares and buying them back within 30 days would not be treated as a loss-making disposal, nor would gifting shares to a spouse or civil partner. McCann suggested selling shares held outside of an Isa, where profits are subject to CGT, then buying them back inside an Isa or pension.
Another option is to sell shares held in your name, that your spouse or civil partner buys back in their name. Otherwise, simply sell shares and use the proceeds to invest in a different company or fund, McCann said.
Now may be an opportunity to reclaim overpaid inheritance tax, which is calculated based on the value of assets at the time of death and is normally payable within six months, typically before probate can be granted. Families can pay too much IHT if those assets fall in value before they are sold. Overpayments can be reclaimed using form IHT35.
McCann gives the example of an estate that paid 40 per cent IHT on investments of £100,000, or £40,000: “If those investments were only worth £70,000 when they were sold, the executors could reclaim the inheritance tax paid on the £30,000 loss. This would give them a £12,000 tax rebate.”
However, this only works if the person who sells the asset had also paid the IHT bill, typically the executor. “If the asset has been distributed to a beneficiary who then sells, the reclaim is not available,” he said.
If some of the investments increase in value, this will reduce the amount of IHT that can be reclaimed, McCann said.
A get-round would see executors only sell investments that have fallen in value, and assign those that have risen direct to beneficiaries. Some 10,000 families have reclaimed overpaid IHT in the last six years but McCann said: “HMRC will not refund automatically. You need to claim it.”
The third way to take advantage of falling asset prices is to gift investments to reduce future IHT liability, effectively freezing the value of the assets at today’s reduced prices. “Any future growth is outside the estate and if death occurs within seven years that growth will not be taxable,” McCann said.
Tax planning is complex and mistakes costly, so consider independent financial advice.