Further thoughts for the pandemic season

In my last article I shared some observations about managing cash deposits and investments in this period of uncertainty resulting from the global pandemic. Whilst this is a worrying time as regards your health and your financial well-being, it can also be a time to take advantage of a number of planning opportunities.

Let’s first of all look at what can be done with your estate planning. If you’ve done your sums and worked out that your pensions and investments are more than sufficient to take care of your needs, now might be a good time to consider making lifetime gifts of shares for example, whether directly or by using a trust. For Capital Gains Tax (CGT) purposes, making a gift counts as the disposal of an asset. Making a gift now may result in you making a loss, which in turn can be carried forward to future tax years to offset future gains. The hope is of course that the shares recover in value and indeed do rather well. In this scenario the value of the gift is set at the date of transfer for tax purposes and not at a subsequent higher value, which would make a difference to the tax liability if you were to die within seven years.

A further point worth bearing in mind is the possibility that the tax regime may change, with the likelihood that it will become more rather than less punitive. Earlier this year an all-party parliamentary group proposed a simplification of the inheritance tax regime. It proposed that all of the current annual allowances be abolished and be replaced by a single allowance of a suggested £30,000. Any lifetime gifts above the allowance would according to the proposal be taxed at 10% immediately with no provision for carrying forward unused annual allowances.  This would drastically reduce the planning options currently available and would be likely to prove rather costly.

It may be that you have sold and paid the tax on shares that formed part of a family member’s estate before the market correction and which have now dropped in value. Provided that the shares are not AIM or unlisted, it is possible to apply to HMRC for loss relief. You have to do this within 12 months of the date of death and there are a number of rules that apply. Space unfortunately does not permit me to go into greater depth, so if you think this area of planning may be beneficial it is important to seek professional advice.

Turning to lump sum investments, it may be a tempting option to stagger contributions when markets are in a volatile mood. The idea is that by buying shares at monthly or say quarterly intervals a drop in the market means that you will be buying more shares as you go along and so getting more bang for your buck. Even if the market only returns to its starting point after 12 months you could end up with a 20% gain. This may well be a suitable approach if you are of a nervous disposition but it’s certainly not a one-way bet. If the market forges ahead you will make nowhere near as much money as you would have by making a single lump sum share purchase at outset. A reasonable assumption might be that with covid 19 and Brexit combined the staggered approach is the one to go for, as it’s not hard to see market volatility continuing with the continuous possibility of substantial corrections over the coming year if not longer. Of course it isn’t possible to know for sure before the event which is going to be the most beneficial route and without the benefit of hindsight there is no right or wrong answer.

Earlier I discussed the potential benefit of realising a capital loss in the context of estate planning. As part of a general strategy it could also be a useful gambit. You are able to carry forward a loss into future tax years, and set it against future disposals; eg the sale of a share portfolio, an investment property or a business. In addition the value realised could be used to fund a pension contribution and, if you are a higher or additional rate taxpayer the tax relief on it could in one fell swoop restore the fund to its par value. The fund could then grow in a tax-free environment until required and in the majority of cases, a higher rate taxpayer drops into the basic rate band in retirement, which is highly convenient from a tax planning point of view.

To conclude, your ability to provide yourself with a tax efficient income in retirement will involve a range of tax wrappers and products. These are likely to include ISAs, pensions, collective investments, individual shares, insurance bonds and possibly some other tax efficient vehicles. They all have their role to play. How you go about using these strategies will depend on your circumstances and objectives. It is therefore difficult to overestimate the value of taking professional advice when faced with so many possibilities.

Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.