Tax opportunities in falling share markets?

02 September 2015

Gary Heynes

Over the last month, share markets worldwide have plummeted, with drops of 9.42 per cent in London, 8.75 per cent in New York, and 12.48 per cent in Frankfurt.

For many, there may be a long-term 'hold' investment strategy and they will sit tight waiting for the markets and their particular stocks to recover and carry on as before. But, perhaps there is an opportunity for tax purposes, to make some use of these falls in value.

Where a loss is realised on the sale of shares (ie, the shares are sold for less than they were acquired) these 'capital losses' can be carried forward indefinitely and utilised against other capital gains arising in the future. The important thing is that the losses are realised – so the shares that have fallen in value must be sold.

Having sold the shares to realise the loss, it is also not possible to simply repurchase the shares if there is a long-term 'hold' investment strategy – a process known as 'bed and breakfasting' – as any repurchase of the same shares within 30 days of being sold would only result in the difference between the sale and repurchase being recognised as a gain or loss.

An alternative – known as 'bed and spousing' – is possible, where one spouse disposes of the shares, thus realising the loss from the original purchase value, and the other spouse reacquires the shareholding. It could also be another individual or entity (say children, trust or investment company) that reacquires the shareholding. This might be a useful way to realise a capital loss while someone or an entity in the family retains ownership of the stock.

Ultimately, when the reacquired stock is sold, the base cost will be much lower than before, so a bigger gain will arise – but if this is a long term hold that might not be an issue. In the meantime, the losses realised can be used against the sale of other investments, including other shareholdings, property and assets liable to capital gains tax.

A useful tax deferral option means there is some light in otherwise dark times for investors. But, to quote the old maxim, 'never let the tax tail wag the investment dog'.