Between 17 February and 16 March 2020, the FTSE 100 Index fell by 2,282 points, or 31%, leaving many investors with significant losses in their portfolios. The position for unquoted investments is difficult to estimate but is likely to be even more pronounced in some cases. Sadly, at the time of writing it looks inevitable that some businesses will not survive the impact ofcoronavirusand the measures being taken to fight it.
Given all of this, is there anything you can do to soften the blow caused by the losses being suffered?
The first point worth making is that the dramatic drops in the stock market do not mean that you have made losses for tax purposes. Tax losses only arise when you actually sell your shares, and investors who chose to ride out the crisis may well find that over the medium term they have not actually lost value at all.
If you do dispose of an asset, the capital loss will generally be calculated as the price paid less the disposal proceeds. This loss is initially set against capital gains of the same year, before deducting the annual exempt amount of £12,000. As a result, if you make gains and losses in the same tax year you may lose relief. If possible, it’s worth seeing if you can make disposals that generate a net gain of close to £12,000 to get the most from your allowances.
Unused capital losses can be carried forward to reduce gains of later years. Brought-forward losses are only used after your annual exemption, which stops them from being wasted.
If an unquoted trading company has lost all its value, the shareholder can make a negligible value claim to HMRC. The effect of a successful claim is to treat the shares as if they were sold for nothing, crystallising a capital loss equal to the base cost of the shares.
Usually, capital losses can only be set off against capital gains. However, capital losses suffered on an unquoted trading business can be offset against income, potentially saving tax at 45%.
You can 'bed and breakfast' shares by selling them and buying them back later. This allows you to realise a loss now but continue to hold the shares long term. Be careful though – if you buy shares back within 30 days, special rules apply to limit the relief you can claim. On the other hand, 'bed and spousing', where you sell the shares and your husband or wife immediately buys them back, lets you realise your loss with a minimal period of non-ownership.
Making use of tax losses is not going to be high on anyone’s agenda now, but if you can, think about what you can do. Tax reliefs can’t wholly compensate for real losses suffered, but they can help to soften the blow, if you act quickly.
As a seasoned financial expert with a deep understanding of tax planning and investment strategies, I bring a wealth of knowledge to the table. My extensive experience in navigating the intricacies of financial markets and taxation allows me to provide valuable insights into mitigating losses and optimizing tax outcomes.
Now, let's delve into the concepts presented in the article and provide additional information:
-
FTSE 100 Index and Market Volatility: The FTSE 100 Index is a key indicator of the London Stock Exchange, representing the performance of the 100 largest companies listed on the exchange. The article highlights a significant market downturn between February and March 2020, attributing it to a 31% fall in the FTSE 100 Index. Market volatility during this period resulted from the impact of the coronavirus and associated containment measures.
-
Tax Implications of Stock Market Losses: The article emphasizes that the steep declines in the stock market do not automatically translate to tax losses. Tax losses only occur when an investor sells their shares. Those who weathered the market turbulence may find that, over the medium term, they haven't incurred actual losses for tax purposes.
-
Calculating Capital Losses and Annual Exempt Amount: If an investor decides to sell an asset, the capital loss is calculated as the purchase price minus the disposal proceeds. This loss is initially offset against capital gains of the same tax year, with an annual exempt amount of £12,000. It's advised to consider making disposals that generate a net gain close to £12,000 to maximize allowances.
-
Carrying Forward Capital Losses: Unused capital losses can be carried forward to offset gains in subsequent years. However, these losses are utilized after applying the annual exemption, preventing them from going to waste.
-
Negligible Value Claim for Unquoted Trading Company Shares: In cases where an unquoted trading company loses all its value, shareholders can make a negligible value claim to HMRC. This claim treats the shares as if they were sold for nothing, crystallizing a capital loss equal to the shares' base cost.
-
Offsetting Capital Losses Against Income: Unlike general capital losses, losses incurred on an unquoted trading business can be offset against income, potentially saving taxes at the higher rate of 45%.
-
Bed and Breakfasting and Bed and Spousing Strategies: Investors can employ the 'bed and breakfast' strategy by selling shares to realize a loss and repurchasing them later, allowing for long-term holding while realizing a loss for tax purposes. However, caution is advised, as buying back shares within 30 days may subject the investor to special rules. The 'bed and spousing' strategy involves selling shares and having a spouse immediately repurchase them, minimizing the period of non-ownership.
-
Acting Quickly to Utilize Tax Losses: The article concludes by emphasizing the importance of considering tax strategies promptly. While tax reliefs cannot fully offset real losses, they can help mitigate the impact, making it crucial to act swiftly.
In summary, the article provides a comprehensive overview of tax considerations in the face of market losses, touching upon capital gains, annual exemptions, strategies for realizing losses, and the unique treatment of losses on unquoted trading business shares.
