Falling stock markets aren’t usually a reason for celebration, and the wild ride that many investment markets have seen this year has been unwelcome for many investors. What’s more, with a recession predicted to hit later this year, markets could hit a rocky patch once again.

While no investor wishes for volatility and downward markets, they can be an opportunity to do some good tax planning and save money on your tax bill. We’ll look at a few ways you can capitalise on falling markets.

The caveat to all of these is that the investments that have fallen in value are things you still believe in, think will bounce back and want to hold for the longer-term. If you’re on the fence there are some helpful articles on how to know whether to sell or how to keep your investments on track in a recession. 

GIFT ASSETS NOW

Anyone doing inheritance tax planning may want to gift assets as part of that. If you gift investments, cash or assets and survive for seven years after that there will be no inheritance tax liability on the money. If you die within that seven-year period there will be some IHT due, but on a sliding scale. You can read more about that here. 

However, one thing that may deter people from gifting investments is that it counts as an event for Capital Gains Tax purposes. That means you need to calculate whether there is any gain on the investment you plan to gift and if it exceeds your annual allowance (currently £12,300) you will need to pay tax on the gains. For investments that tax will be 10% for basic-rate taxpayers and 20% for higher or additional rate payers. Crucially, the tax is paid by the person gifting the asset and it may be that you don’t have spare cash to pay that tax bill.

But if investment prices have fallen, that means a lower capital gain and so less tax to pay – or potentially no tax bill if the gain now falls within your annual tax free allowance. If you know you want to gift the investment anyway, doing so during a market downturn could be a good opportunity.

Let’s look at an example: Tamsin wants to give £40,000 of shares to her daughter, but there is a £20,000 gain on the shares. As she hasn’t used any of her tax-free allowance this year, the first £12,300 of gain is covered. As a higher-rate taxpayer she will have to pay 20% tax on the remaining £7,700, meaning a tax bill of £1,540. However, if markets fall and the shares are only worth £35,000, she will only have a gain of £15,000, meaning her tax bill is reduced to £540 – saving £1,000.

BED AND ISA NOW

Using a similar concept to that above, of lower investment values meaning a smaller capital gain on your investments, this can also help with funnelling your money into an ISA. Anyone with investments outside an ISA can move them into their ISA to protect from future tax and to realise any gains up to your annual tax-free limit.

This process is called Bed-and-ISA and means selling investments to realise gains up to the £12,300 limit and then buying them back within your ISA. You just need to make sure you’ve got sufficient CGT and ISA allowances left in the current tax year.

If asset prices have fallen, it means you can move more shares into your ISA before hitting that capital gains tax limit. An example: Amelia has 10,000 shares in Company X that she bought for £1 each and are currently valued at £3 each, meaning a gain of £2 per share.

If she wants to use Bed and ISA and sell enough to use all her £12,300 CGT limit she can sell 6,150 shares and buy them in the ISA. However, if the share price falls to £2 the total gain on her shares would only equal £10,000 and she could move all 10,000 shares into her ISA and still have some CGT limit left over. In reality the calculations wouldn’t work as neatly as this due to costs and differences between buying a selling costs, find out more here. 

RECLAIM TAX PAID ON AN ESTATE

This is a more niche example, for anyone involved in wrapping up an estate for inheritance tax purposes. The strange way the system works is that assets are valued on the date of death, and inheritance tax is paid on that sum.  However, if those investments are sold within a year of the death and for a lower amount, you can reclaim the IHT on the difference.

Example: Maureen died, leaving behind an investment portfolio worth £100,000 as part of her estate. However, by the time the executor comes to sell the investments six months later, the value of the portfolio has dropped to £70,000. By using share loss relief, the executor can reclaim IHT on the £30,000 difference, which at a rate of 40% equates to £12,000.

That means if a market downturn has occurred since the individual died, you’re likely able to claim back tax as you’ll be selling investments for less than they were previously worth. Anyone wanting to do this can use the scheme called “share loss relief” and get a rebate of the IHT they are due.

In some situations for larger estates this will also affect the level of tax-free reliefs you’re entitled to. The residence nil rate band, which is complicated, is tapered out for estates worth £2 million or more. If the estate has only just tipped over this limit, a drop in investment markets (and so the value of its assets) could bring it back under the limit and mean the estate is entitled to more tax-free allowances – which means an even bigger IHT rebate.

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