As the cost of living soars and the UK economy risks recession, a share or house price crash could reduce the value of key family assets such as pensions, Isas and property. With careful planning, families could beat Sunak’s five-year IHT and CGT freeze and cut the amount of tax they owe to HM Revenue & Customs.
Some families could save tens of thousands of pounds as a result, 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.”
He added: “Investors currently sitting on capital losses can make use of these to reduce any future gains, without coming out of the market.”
In his Budget last year, Sunak froze inheritance tax nil-rate bands and the capital gains tax threshold for five years, which will drag more families into the net as share and house prices rise in that time.
But as shares and crypto-currencies such as Bitcoin crash, families have a chance to fight back.
They could reduce a potential 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,” McCann said.
It has to be done carefully, though, to avoid making costly mistakes. For example, 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 again, but this time inside your £ 20,000 Isa allowance or a tax-efficient pension.
Another option is to sell shares held in your name, that your spouse or civil partner then 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 also be an opportunity to reclaim overpaid inheritance tax, which is calculated based on the value of assets at the time of death.
HMRC normally expects executors to calculate and pay the outstanding IHT within six months. Typically, this is before probate has been granted.
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Families can pay too much IHT if those assets fall in value before they are physically sold, but overpayments can be reclaimed using inheritance tax form IHT35.
McCann gives the example of an estate that paid 40 percent IHT on investments of £ 100,000, or £ 40,000. “If those investments were only worth £ 70,000 when they were finally 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.
He said: “If the asset has been distributed to a beneficiary who then sells, the reclaim is not available.”
If some of the investments increase in value, this will reduce the amount of IHT that can be reclaimed, McCann said.
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A get-round would see executors only sell investments that have fallen in value, and assign those that have increased direct to beneficiaries.
Some 10,000 families have reclaimed overpaid IHT in the last six years but McCann said: “HMRC will not give the refund automatically. You need to claim it. ”
Another way to take advantage of falling asset prices is to gift investments to reduce future IHT liability, either directly or into trust.
By doing that, you are 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 so consider independent financial advice to take full advantage of this opportunity.