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Seven things you might need to know when markets fall

Author Image Neil MacLeod Technical Specialist
6 minutes read
Last updated on 5th May 2020

Background

With markets in turmoil around the world, it’s probably not a question of whether the value of your clients’ investments has reduced, but by how much.

The immediate priority may be to allay your clients’ concerns, but it’s also worth considering the tax implications as there is legislation which explains how to deal with losses and falls in value.   

Here’s a brief overview of seven tax points you might want to bear in mind over the coming months.

Chargeable Event on Death (S541(1)a) ICTA 1988)

The death of a life assured can trigger a chargeable event however it may be some time before the provider is notified about the death by which time the value of the investment may have changed.

For chargeable event purposes, where the death of the life assured has caused the chargeable event, the surrender value used for the chargeable event calculation is the day immediately before the death. The fact that the claim value may be higher or lower than this is ignored for the purposes of calculating the gain.

The bond provider’s terms and conditions should confirm what the claim value will be as it could be as at the date of death, the date the provider was notified of the death, or the date it received the requirements for paying out.

Deficiency Relief (S539-541 ITTOIA 2005)

'Deficiency relief' may be available to individuals when an insurance bond comes to an end and the gain calculation shows a negative.

For entitlement to deficiency relief to arise there are certain conditions that must apply:

  • the calculation of the gain on the final chargeable event shows a negative amount
  • one or more gains arose on 'excess events' in earlier tax years on which the same individual was liable, and
  • the individual is the chargeable person (i.e. would have been liable had the calculation shown a gain)

The amount of deficiency relief will be the lesser of the deficit calculated in the final chargeable event calculation, and the total of gains on previous 'excess events' which formed part of the total income of the same individual who is now benefiting from the relief.

Deficiency relief is given as a tax reduction from the individual's income tax liability for the year, but unless income is liable at higher rate or dividend upper rate (not additional rate) on some income, there will be no tax reduction and deficiency relief will be of no benefit.

Non Trading Debits (Part 6 , Chapter 11, CTA 09) / (S297(3) CTA 09)

Investment Bonds owned by companies are assessed under the “loan relationship rules” rather than the chargeable event regime and as such any gains are subject to corporation tax.

Where a Bond falls in value either between accounting periods (where the company uses fair value accounting), or triggers a loss on encashment, this creates a “non-trading debit”.

This non-trading debit can be offset against the company’s other profits for the purposes of calculating their corporation tax.

Capital Losses (S2 CGT Act 1992)

If a loss is crystallised on disposal of an OEIC the loss can be offset against the individual’s capital gains. The treatment of losses depends on whether they are losses made in the current tax year or a previous tax year. The process for offsetting against gains is as follows:

  1. Deduct any allowable losses accruing in the year of assessment from gains made in that same year – even if the net chargeable gains fall below the AEA (losses which cannot be set against gains of the same year of assessment are carried forward and set against gains which arise in the future).
  2. If the net gains after deducting current year losses are more than the AEA (£12,300) and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit.
  3. If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years.

Remember, a loss will not be allowable unless quantified and claimed via self assessment or in a free standing claim

Additional Permitted Subscriptions and Continuing Accounts (ISA Regs 2017)

A spouse or civil partner can make “additional permitted subscriptions” to their ISA up to the value of their deceased spouse or civil partner’s ISA.

Where the investor died on or before the 5th April 2018 the APS is limited to the value of the deceased's ISA at their date of death, however, the position is slightly different where death occurred on or after the 6th April 2018. In these circumstances the surviving spouse can potentially use either the value of the deceased’s ISA at their date of death or the point the ISA ceased to be a continuing account of a deceased investor.

This means if the ISA has reduced in value during the administration period you may still be able to claim the higher value for the purposes of making your additional permitted subscriptions. It’s important to note that if the spouse decides to make use of the APS based on the value on death they cannot subsequently claim the value when the ISA ceases to be a continuing account.

Fall in value relief (S131-140 IHT Act 1984)

“Fall in Value Relief” provides the recipient of a gift made during the donor’s lifetime some IHT relief where the value of the gifted asset has fallen in value between the gift being made and the donor’s death.

It could apply where tax, or additional tax, is payable because of the transferor’s death within seven years of a lifetime transfer, and the value of the transferred asset has fallen between the date of the transfer and the date of death.

This means the relief could apply to either the tax payable on a failed PET or CLT.

Loss on sale of shares (S178-189 IHT Act 1984)

When someone dies any stocks and shares, unit trusts or OEICs in the estate are valued for Inheritance Tax purposes using their value at the date of death. However, the price of these investments can fluctuate significantly post death.

If shares are sold in the year following the death at an overall loss, relief may be available.  Broadly speaking, the relief allows for the sale price to be substituted for their date of death values for IHT purposes.

Four conditions must be met before the relief may be claimed. These are:

  • The shares sold must be ‘qualifying investments’ (this includes listed shares, OEICs and unit trusts)
  • The sales must be within 12 months of death
  • The shares must be sold by the appropriate person (this is the person or persons liable for the payment of IHT on the shares value)
  • There must be an overall loss on the sales of the qualifying investments

"Prudential" is a trading name of Prudential Distribution Limited. Prudential Distribution Limited is registered in Scotland. Registered Office at Craigforth, Stirling FK9 4UE. Registered number SC212640. Authorised and regulated by the Financial Conduct Authority. Prudential Distribution Limited is part of the same corporate group as the Prudential Assurance Company. The Prudential Assurance Company and Prudential Distribution Limited are direct/indirect subsidiaries of M&G plc, a company incorporated in the United Kingdom. These companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential plc, an international group incorporated in the United Kingdom.