How a falling market could offer a tax silver lining

It’s hard to ignore the fact that stock markets globally have seen high levels of volatility since the start of the year, with lockdowns in China and the war in Ukraine, as well as high inflation and rising interest rates causing difficult times for anyone with money in the markets. Although no one wants their investments to go down, it’s worth remembering that there can be positives taken from this. It is only when investments are sold, that any fall in value is realised and tax implications become relevant. This is when the tax treatment of certain investments can be potentially used to your advantage.

How a falling market could offer a tax silver lining

Capital Gains Tax (CGT) is due on profit when an asset is disposed of if it has increased in value since acquisition by the owner. Some assets are capital gains tax free, for example, your main residence or monies held within an ISA and pensions, and each individual has a yearly capital gains tax exemption, which is currently set at £12,300 and is frozen until April 2026.

Disposing of an asset includes selling it, giving it as a gift, swapping it for something else and even compensation pay outs for assets lost or destroyed.

If you have an asset that you need to access in part or in its entirety, on which you have made a gain, it could be possible to reduce the capital gains tax that may be payable.

What is tax loss selling? 

Tax loss selling, or tax loss harvesting as it’s sometimes known, is a strategy used by investors to reduce capital gains tax due on an asset by selling another at a loss. By using losses, together with an annual exemption, it may be possible to make large gains but pay little or no CGT.

Can investment losses offset CGT?

It is possible to use a loss that has arisen on an investment against capital gains made on other assets. So, if for example you have a buy to let property, or a portfolio of properties built up subject to capital gains tax, and you’ve been thinking of selling some or all of these but are worried about the tax you may have to pay, now might be the right time. 

As mentioned above, gifts are also included as disposals, and therefore if you have been thinking of passing your wealth onto future generations, now might be the right time. For example, if you hold an asset which was previously valued at £100,000, which had been purchased for £50,000, but it’s recently dropped to £75,000, any capital gains would be due on the value now. So, in this example, tax is due on the £25,000 profit rather than the previous £50,000 profit. Investment markets are unsteady at the moment, but over the longer term, they should increase, and it is not unlikely that the £75,000 could surpass the £100,000 value in future.

How to pay less capital gains tax 

It is possible to reduce the amount of capital gains tax you pay irrespective of falling markets and having the right tax planning strategy in place is vital for any investor. It may be that you’ve inherited an asset, or perhaps a savvy parent made an investment for you as a child, and gains have been accumulating over the long term. If you look to sell down part of an asset with a large gain, it is worth looking to do this at the beginning of April before the 6th of April and the start of next tax year, and if possible, staggering the sell down, to make use of your CGT exemption across two tax years. This can also be the case for direct shareholdings in single companies, as well as a portfolio of securities. It’s also worth thinking about using the inter-spouse exemption; If you’re married or civil partners, any assets can pass between you without being liable to capital gains tax and therefore it’s possible to have a CGT exemption of £49,200 without even thinking about losses! This is before you consider any offsetting of losses that you may take advantage of.

How to claim investment losses on taxes

It is simple to claim investment losses, and all that’s needed is to include this on your tax return. If you’re not Self-Assessment registered, you can write to HMRC. You don’t have to report losses straight away and can claim them up to 4 years after the end of the tax year in which you disposed of the asset, so it is always worth having a look back over the past few years in case you haven’t claimed previous losses. Losses will stay on your HMRC account until they’ve been fully offset against gains made, and therefore it’s important you make sure to claim them.

How we can help

If you’d like to learn more about how you can minimise your capital gains tax bill, why not get in touch and speak to one of our expert financial advisers. We’re offering anyone with £100,000 in savings, investments and pensions a free financial review worth £500. Find out more.

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Please note: The value of investments can fall as well as rise, you may not get back what you invest. The Financial Conduct Authority (FCA) does not regulate tax planning.