The start of 2020 has seen considerable falls in the value of investment funds. It seems that there is hardly an asset class that has avoided taking a hit. This fall has undoubtedly been due to the coronavirus and the worldwide lockdown that effectively followed. It’s worth remembering, however, that paper losses are just that unless and until you sell or otherwise dispose of, or in some other way immediately need the investments concerned. Only then do they become real losses.
One perhaps overlooked opportunity lower values present is that they make it easier to restructure or rebalance investment holdings. They can also sometimes help longer term inheritance tax planning.
Often long-term employees of listed UK companies build up substantial shareholdings in their employer as a result of share schemes, such as the tax-favoured share incentive plan or SAYE plan. The end product can be a ‘portfolio’ heavily weighted towards just one company’s shares – the same company that is the investor’s salary provider and pension funder. Ordinarily someone would not invest by keeping all their eggs in one basket. However, a strange anomaly of a SAYE investment plan is that the investors have no alternative other than to invest in the shares of just one company. Sometimes these savers are not ‘sophisticated’ investors and are perhaps taking too much risk then they would do had they been invested in an alternative scheme.
The averaging of prices that goes into a capital gains tax (CGT) calculation can make it difficult to sell down such an outsized holding without facing a tax charge. Now that the value of those shares might have fallen by 20% or more, there is greater scope to create a more balanced portfolio before tax looms into view.
Estate planning is another area to focus on. If you make an outright gift of shares or holdings in funds, then for CGT purposes you are in the same position as if you sold the holding. Here lower values have three benefits:
- The taxable gain is reduced or even transformed into an allowable loss.
- Your gift has a lower worth than it would have done at the start of the year, so if it does fall back into the inheritance tax calculation under the seven-year rule, it will have a smaller impact on your estate’s inheritance tax calculation.
- Any recovery in value occurs outside of your estate.
There are several other ways to utilise market falls in your planning but, as always, make sure you take advice before taking any action.
If you are invested in a pension product, such as pension drawdown, then there is not any scope to take advantage of some of the options discussed above. However conversely, the pension fund is outside of your estate for tax purposes and it is highly unlikely that the saver would only be invested in shares from just one company – at least we hope not.
Wall this may present a short term opportunity for some, it is nevertheless hoped that markets do make a full recovery. While historically they always have, the real question is just how long it could take.
The value of your investment can go down as well as up and you may not get back the full amount you invested.
Past performance is not a reliable indicator of future performance.
Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
Tax treatment varies according to individual circumstances and is subject to change
The Financial Conduct Authority does not regulate inheritance tax advice.