HMRC loophole as stock market crash could slash money off your tax bill

It’s been a brutal day for stock markets across the world with stocks in the US, UK, Europe and Japan all significantly down, wiping billions from companies and costing people with investments thousands of pounds, dollars or yen.

While having your investment portfolio go down is never really good news, those who have seen losses could at least take advantage of a little known tax rule.

Capital Gains Tax is a tax on money made on investments or second properties. If you buy a buy-to-let flat, or pump money into the stock market, you will be liable to pay tax on the gains to HMRC when you sell that property or those investments, assuming the gain is larger than your allowance - usually £3,000 a year.

But with global markets taking a battering today, many investors including those just starting out will be facing the prospect of losing money if they sell their stocks now (although many investors urge not to do that).

The FTSE 100 is down by more than 2 percent, while the US Dow Jones’ S&P 500 lost 2.4 percent, and Japan’s Nikkei 225 lost 12.4 percent, its worst day since 1987.

If you do need to reduce your tax bill, perhaps because you already sold some stocks at a gain, or sold off a flat, shedding investments at a loss is one way to bring your bill down.

The UK government explains: “When you report a loss, the amount is deducted from the gains you made in the same tax year.

“If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.”

To report a loss, you need to file a self-assessment tax return to HMRC. You have up to four years to report losses, so if you know you plan to sell a second home within the next four years, selling the investments now could be used to bring down a future tax bill.

HMRC adds: “Claim for your loss by including it on your tax return. If you’ve never made a gain and are not registered for Self Assessment, you can write to HMRC instead.

“You do not have to report losses straight away - you can claim up to 4 years after the end of the tax year that you disposed of the asset.”

Although the losses can’t be used to reduce your income tax, it can still be a useful way to cut Capital Gains taxes.

Accountants Tax Assist add: “When shares are sold for more than the amount originally paid for them a capital gain arises and capital gains tax is charged accordingly. When shares are sold for less than the amount originally paid for them, a capital loss arises. Unfortunately, capital losses arising on the sale of listed shares cannot be offset against income tax liabilities. Instead, they are offset against capital gains arising either in the same tax year, or in future years.”