Four tax tricks to save money when stocks and house prices are falling

British investors have watched their savings suffer as share prices plunged by a fifth and swathes of companies cut their dividends in the wake of the outbreak of Covid-19. 

Even oil giant Shell is denying shareholders a payout for the first time since the Second World War, after oil prices plummeted and world governments put a freeze on the global economy.

With forecasts suggesting around half of dividends could be put on hold this year, there will be lean times ahead. But depressed markets provide a unique opportunity to cut your future tax bill, even while remaining invested, or claw back on duties if you have paid over the odds. Here are four ways you can leave yourself better off.

1. Use your Isa allowance now 

Now is the perfect time to move shares, funds or trusts into an Isa to protect assets from income, capital gains and dividend taxes. There are two reasons for this. First, moving money into the tax-free wrapper will immediately protect it from taxation. Any growth in the holdings thereafter, if the market recovers, will also be protected.

Second, you can record the fall in the value of your holdings and offset these against any future capital gains tax bills, even if you stay invested.

The rules say that selling holdings and buying them back within 30 days will not be counted as a loss for tax purposes. However, using a “Bed and Isa” transfer – where your holdings are sold and immediately bought back within an Isa –circumvents this and still counts as if you have “crystalised” a loss, which will be tax deductible.

Many people will be yet to use up all of their annual £20,000 Isa subscription so early into the tax year and can also save up to £9,000 this year into a Junior Isa on behalf of a child. 

2. Offset losses 

For those who have already used up their Isa allowance, there are still ways around the 30-day rule, which will allow you to record a loss in your investments for tax purposes while remaining invested so as not to miss out on any gains in the market. 

This includes buying a different but similar fund or share, or alternatively, asking your spouse or civil partner to buy them back instead, according to Sean McCann of advisers NFU Mutual. 

For those who have already chosen to sell out of the market and have incurred a loss, they can offset the loss in the normal way by deducting it from gains duties in future tax returns. 

“The big 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 and buy to let property,” Mr McCann said. “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.”  

3. Reclaim overpaid death duties 

Inheritance tax (IHT) must be paid within six months of the date of death by the estate of the deceased and typically before its assets can be accessed and divided up among family members and other inheritors.

It can take as long as a year to get everything formally tied up and financial institutions have different rules on transferring monies or cashing in assets before the formal documents have been presented.

Estates can end up paying death duties on legacy investments, based on their value at the date of the death, only for that value to drop later. It means paying tax on lost money. Executors selling within 12 months of death assets that have fallen in value can reclaim the death duties paid on the loss. This can be done using an IHT35 form.

4. Gift assets while values are lower 

When markets are down it is also a good time to make gifts of investment portfolios or second homes for those people looking to reduce their IHT bills using the “seven year rule”.

Any gift made and survived for at least seven years becomes IHT free. The value of the gift is frozen at the date it is made and any future growth is outside the estate and if death occurs within seven years will not be taxable.

Gifting assets when their values are higher runs the risk of more being caught by taxation if you die within seven years.

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