There is no road map for private individuals to navigate the current crisis, which is proving to be an extremely testing time for everyone. However, there are some tax opportunities investors could consider to cushion the blow.
Julia Rosenbloom, Tax Partner at Smith & Williamson in Birmingham suggests that giving away assets during a market crisis provides individuals with two opportunities.
Giving away assets during lifetime is a common way that wealthy individuals keep assets within the family and reduce the potential inheritance tax (IHT) their beneficiaries will pay. This is because under “potentially exempt transfers” — more commonly called the seven-year rule — assets given away during an individual’s lifetime are excluded from IHT if the person lives at least seven years after making the gift.
So what are the benefits to gifting away assets now?
Firstly, it will give the individual the ability to pass on assets at a lower value and pay any potential capital gains tax (CGT) on a smaller gain (or possibly no gain at all). Secondly, if the donor does not survive seven years, and the asset passes back into their estate for IHT purposes, it will be valued at the point it was given away.
An example would be somebody who had a share portfolio that was acquired at £50,000, but worth £100,000 before the recent market falls. If the person had gifted that portfolio to their child at its peak valuation, they would have to pay CGT on the £50,000 gain (above the current annual CGT exemption of £12,000). Assuming that the shares are worth £75,000 after recent market falls, this means the individual will only have to pay CGT on a £25,000 gain (again, above the annual exemption). This could be an opportunity for families with a long-term view who believe the shares are likely to bounce back after the impact of coronavirus subsides. Of course, the dilemma for investors considering such a move is whether their portfolio — and the potential CGT gains — will fall even further in the intervening period.
We are working with our clients to discuss a number of ways they can offset investment losses against tax during the crisis. If you would like to discuss the actions you could take to ease the financial burden please get in touch.
Please note these comments were previously published by Emma Agyemang in the Financial Times on 25/03/2020
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.