Financial meltdown creates opportunities
13th March 2020
Posted in Articles, IHT by Forbes Dawson
The issue
World stock markets are in disarray and anything which could act as an enjoyable distraction is being cancelled. There won’t even be any live sport to watch as I lie sweating in bed! Is there a silver lining? Although I can’t think of anything particularly positive to say about a global pandemic, there may be a few useful bits of tax planning which can be undertaken to distract from the hysteria. I consider these below.
Inheritance tax (IHT) trust planning
Assets of up to £325,000 can be contributed by an individual to a trust every seven years without triggering the 20% IHT charge which is normally payable. Investments which were worth much more a few weeks ago can now be put into a trust whilst falling within the £325,000 limit. Any gains can be held over by making an election with the trust.
It may be beneficial to sell loss making assets on the market first, so as to trigger capital losses that can be set against gains earlier in the year, or indeed be carried forward. The cash could then be settled directly into the trust and the trust could buy the investments back off the market. Beware, you won’t be able to use losses crystallised on a transfer of shares in specie to the trust (‘clogged losses’ when to a connected person) quite to easily, so a sale on the market is usually better.
Non-trust IHT planning
Capital gains tax is often a barrier to passing on wealth to younger generations. For example, no-one wants a CGT liability and an IHT liability on a failed gift. The crash may allow gifts to be made free from capital gains tax, although the seven-year gift clock will still operate for IHT purposes. What’s to lose though in this situation?
Once again where losses would arise, it may be worth the donor selling and the recipient buying back on the market (to avoid clogged losses as set out above).
Triggering capital losses
Before the meltdown, many people will have triggered capital gains over the course of the 2019/2020 tax year. Although it is no longer possible to crystallise losses by selling investments and buying them back (so-called ‘bed and breakfasting’) because of complicated matching rules, ‘bed and spousing’ still works. In the current context this would work by one spouse triggering a loss (against which to offset gains) and the other spouse buying the investments back off the market.
This kind of planning should always consider transactional costs but will often be worthwhile given the reduction in capital gains tax which can be achieved.
Final comment
This is all very well but let’s hope the economy recovers, and more importantly try to stay healthy!
