INVESTMENTS - 03.09.2020

Tax relief for share value fall

The stock market is up and down following fears of a second wave of coronavirus. The directors are reviewing the shares they own. Could the fall be good news in terms of tax planning and what will you save?

Do it for the kids?

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 keeping the assets in the family. This is because the gift is treated as a potentially exempt transfer for IHT purposes, so provided you survive seven years after making the gift, the value will be excluded from your estate for IHT purposes.

The catch. 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 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.

Fall in value

The dramatic fall in the stock market in March 2020 means it’s likely you will have seen a significant drop in the value of your listed share portfolio. After rallying they seem to be going the wrong way again. All this bouncing around doesn’t help you plan but you should keep an eye on the share price.

Tip. A good time to pass your shares to the next generation is when your shares are low in value. This is because 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 Acom 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 per 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.

Don’t forget. 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.

What about IHT?

If you don’t survive seven years after making the gift of shares, their value will be considered when calculating the IHT payable on your estate when you gave them away, not their value on the date of death.

What you’ll save

Based on the example above.

Share cost Total Transfer price Transfer total CGT
Peak £4.50 £45,000 £8.78 £87,800 £6,100
Slump £4.50 £45,000 £3.84 £38,400 £0

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. In our example it saved a potential £6,000.

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