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Did You Know Investments Losses Can Be Set Against Your Tax Bill?

written by Bella Palmer

If you’re an investor sitting on losses that have been incurred over the past few months, you’d be far from alone. If you’re investing for the long term and have a strong, well-balanced portfolio it also shouldn’t be anything to really worry about. Quite the opposite for investors with a long-term outlook, many of whom have used the March sell-off as an opportunity to snap up bargains. And even assets bought at higher prices that now represent paper losses should, if they are fundamentally sound, bounce back.

But not every investor has the luxury of being able to wait out a recovery. Those who need to draw down an income or raise cash required elsewhere from investments in the nearer term face turning paper losses into actual losses by selling. That’s certainly not an ideal scenario but it can also be far less of a hit than many investors realise.

Losses sustained on investments sold at a lower price than they were bought at can be significantly reduced by being offset against future tax bills due on profits. Unless all of your investments are held in a tax-efficient wrapper such as an ISA or SIPP, you will be charged Capital Gains Tax (CGT) on any profits they generate. The difference between the price you bought and sold at, if the latter is the higher number.

Can I Offset Stock Market Losses Against My Tax Bill?

But many investors are unaware that capital losses taken on investments can be set against future gains. A £10,000 loss will cancel out the Capital Gains Tax due on a £10,000 gain. Which means investors who would like to raise some cash by selling investments, but are being put off because doing so would mean crystalising losses, may be able to re-evaluate the real impact of those losses.

Selling investments and setting losses incurred against future gains doesn’t come without a price. It does mean that money is no longer invested in the stock market and won’t benefit from any recovery.

Until 1998, the system could be played by investors through a practise dubbed ‘bed and breakfasting’. The term referred to selling shares one day and buying them back the next day but this loophole was understandably closed and now any sale and buyback of shares within 30 days means any loss realised on the original sale doesn’t count as a tax loss.

However, there are still some solutions or loopholes that can be taken advantage of. One option is to sell shares at a loss that can be set against future taxable gains on other assets but have a spouse or civil partner buy them back if you still believe in their long-term potential. Another alternative would be to sell equities held outside an ISA or SIPP wrapper but then buy them back inside an ISA or SIPP.

It’s an approach that might be considered as a tax optimisation manoeuvre by investors who don’t immediately need liquidity from a sale and still believe in the long-term potential of stocks currently representing a loss.

For those who do, however, need the cash and don’t plan to optimise their tax bill while re-buying stocks sold at a loss, there are still other options.

Can I Set Losses Realised On Shares Against Taxable Profits Realised From Other Asset Sales?

The good thing about Capital Gains Tax is that losses realised on any investments that would have been liable to a CGT hit if profitable, can be offset against any other profits on which CGT is due. Those profits don’t have to be realised on other stocks. Profits on other asset classes where Capital Gains Tax is applicable can also be offset.

You Can Offset Capital Gains Tax Due On Investment Property With Stock Market Losses

For example, if you realise a profit on the sale of a buy-to-let property, the CGT bill for that can also have the loss sustained on shares set against it. That means if an investment property is sold for a £50,000 profit, and the same investor has sustained a £50,000 loss on equities sold, the latter can be set against and neutralise the former.

Even if the stock market losses are higher than the CGT due on other profitable investments, the difference can be set aside to carry forward and set against profits realised from other investments in future years.

Stock Market Losses Can Also Reduce Inheritance Tax Bills

In the unfortunate circumstances of an individual passing away, stock market losses their estate has incurred could be set against any inheritance tax (IHT) bill. There is, however, a limited window of opportunity for this approach. Inheritance tax is normally due within six months of the deceased estate being settled.

But if markets have fallen after the estate has been initially assessed for IHT, the executor can sell equities up to 12 months after the death and reclaim IHT calculated and paid at the higher value.

One issue here is that IHT is calculated across the deceased’s whole estate, so if losses are realised on some stocks but other assets have gained in value, the gains will reduce the value of what can be reclaimed. However, this only applies if assets are liquidated so it is possible for an executor to directly pass on assets that have gained in value to inheritors and only sell for cash those that have dropped in value.

For How Many Years Can Investment Losses Be Carried Forward To Be Offset Against Future Gains?

The best thing about the CGT system of offsetting investment losses against future gains is that the time period over which this can be done is indefinite. Losses sustained now can be offset against a Capital Gains Tax bill that comes up a year, 5 years, 10 years or 20 years or longer from now.

You cannot, however, reclaim CGT already paid on previously realised profits, even if you subsequently sustain losses on other investments. The tax relief only carries forward.

But if you do have to, or would prefer to, liquidise investments for cash you could use in the short term but are reticent to sustain a loss, make sure you do your homework. There’s a significant chance that you will be able offset all or part of those losses against future gains, significantly reducing the disincentive to take the initial hit.


The opinions expressed by our writers are their own and do not represent the views of UK Investment Guides. The information provided on UK Investment Guides is intended for informational purposes only. UK Investment Guides is not liable for any financial losses incurred. Conduct your own research by contacting financial experts before making any investment decisions.

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