Top Ten Tips: Profiting from uncertainty

INVESTORS have seen markets fall (and occasionally rise) in quite eye–watering proportions since the start of August. While this does little for the blood pressure, it does present some opportunities for investors. Peter Young, director of tax at Johnston Carmichael, shares his top tips on using volatile conditions to your advantage:

1 SELL SHARES TO YOUR PENSION

If you have faith that your holdings will recover their value, consider selling shares that have fallen in value to your pension plan. That way, any rise in market value will be protected from capital gains tax (CGT) within the pension fund. It may also be possible to transfer shares as a direct pension contribution to your pension plan. This will secure at least 20 per cent basic rate tax relief. For higher-rate and top-rate taxpayers, it could result in an additional 20 per cent or 30 per cent tax relief respectively.

2 USE AN ISA

There are tax rules limiting the ability of individuals from selling shares and immediately buying them back, but it may still be possible to sell shares and buy them back through an individual savings account (Isa). That means any losses can be banked and any uplift in share value can be shielded from tax through an Isa wrapper.

3 DAY TRADE – IF YOU HAVE THE NERVE

We are seeing huge volatility across the markets and this is showing up in some company shareholdings. If you have the means and the nerve, you could exploit the markets by buying and selling when a recovery in the share price arises perhaps a day or two later. However, be wary that this can create tax issues in itself. There are special tax rules applying to where shares are sold and bought back within 30 days of sale and you should take tax advice before embarking on day trading.

4 USE YOUR CGT ALLOWANCE

Individuals can realise gains of up to £10,600 in the current tax year and this will increase annually by the consumer prices index (CPI) measure of inflation. If you have used the current market conditions as an opportunity to buy, consider crystallising any gains within the annual exemption to realise tax free gains.

5 PROTECT CAPITAL LOSSES

If you complete a tax return you can claim the losses by completing the capital gains (CGT) supplementary pages. If you do not complete a return and the losses may be utilised in the future, contact your tax office to alert them to the losses so you can claim them in the future if the need arises.

6 USE YOUR LOSSES

Remember that for CGT purposes, gains and losses are aggregated to produce either a net gain or a net loss at the end of the year. If you have gains below your £10,600 annual exemption, there is little tax point in realising a loss on a shareholding as that will simply reduce the gains that are already covered by the annual exemption. The timing of disposals is important for tax, although it is always important that you do not let tax considerations cloud your investment perspective.

7 CHARITY CONTRIBUTIONS

For higher-rate and additional rate taxpayers, now might be the time to consider making charity donations. Quoted shareholdings can be gifted to charity. This can crystallise higher-rate or additional-rate tax relief for the donor. Any gain notionally made on the gift is not charged to tax.

If you are considering gifting shares, discuss this with the charity concerned. It may be in your interest to gift shares directly, where you would be liable to pay tax on any gain. Where the shares are likely to give rise to a loss, consider selling these to crystallise the loss and simply gift the cash instead.

8 IHT IMPLICATIONS

Falling markets present a good opportunity to transfer assets to the next generation at lower CGT and inheritance tax cost. Any uplift in market value of the shares will fall within the donee’s estate rather than yours.

9 POUND COST AVERAGING

It can be difficult knowing when to invest in a volatile market. At times like this it’s worth taking a “little and often” approach, whereby you invest on, say, a monthly basis rather than paying in a large lump sum. This, in theory, should help to smooth out investment risk, particularly if you were to invest a lump sum the day before a big drop in the market.

10 LOOK LONG TERM

Volatility is not always a bad thing over the long term. As you approach a financial goal, (such as a child’s education or your retirement) you could consider switching out of investments and into cash to secure what you have accumulated to date.