Locking in a loss to offset future capital gains?

[Rajput1962]

Like many investors, some of my investments are showing a loss - anything invested in the last couple of years. However, before the current rout all my investments were looking healthy; I have confidence that in time investments will recover because 'the stock market always does'. I'm mostly invested in index trackers so the market is what it is.

So here's my question: If i was to sell my VWRL and buy VEVE instead, i could lock in my VWRL loss to offset against any future gain in VEVE. Performance wise, they look similar (albeit VEVE has no EM) and both seem to go up and down at approximately the same levels. The discrepancy is small compared to the overall expected increase.

My thinking is that the loss could be offset against future capital gains tax. And then every year keep swapping between VWRL & VEVE
to optimise capital tax gains allowance, without being out of the market for any length of time.

What is the flaw in my logic?!

[GeoffF100]

Like many investors, some of my investments are showing a loss - anything invested in the last couple of years. However, before the current rout all my investments were looking healthy; I have confidence that in time investments will recover because 'the stock market always does'. I'm mostly invested in index trackers so the market is what it is.

So here's my question: If i was to sell my VWRL and buy VEVE instead, i could lock in my VWRL loss to offset against any future gain in VEVE. Performance wise, they look similar (albeit VEVE has no EM) and both seem to go up and down at approximately the same levels. The discrepancy is small compared to the overall expected increase.

My thinking is that the loss could be offset against future capital gains tax. And then every year keep swapping between VWRL & VEVE
to optimise capital tax gains allowance, without being out of the market for any length of time.

What is the flaw in my logic?!

No, that makes sense. VWRL = 0.9*VEVE + 0.1*VFEM. The exact proportion of VEVE can be calculated from the percentages of US in VWRL and VEVE. It is cheaper to hold the combination of VEVE and VFEM.

I have recently sold two directly held UK shares to fill my CGT allowance, and used the proceeds to top up my holding of VFEM to its market weight. That has moved up the CGT base of my UK portfolio, which I would like to sell and buy a tracker. I could sell it now, but I do not like the current volatility or spreads.

[Dod101]

It seems we can carry forward losses for up to 4 years so you need to bear that in mind, and of course only losses outside of an ISA or SIPP!

Unfortunately I sold some Unilever at £50 and thought that was a good idea but I bought many years ago(maybe 25) and much of the £50 per share is a capital gain. I am now scrambling to find losses because most of my shares are now in a tax protected environment.

Dod

[BirlingB]

Trying to understand the CGT lockin (mental financial overload from having to get to grips with CTF conversions to JISA for the kids,Voluntary NI contributions for me and a workplace pension for the daughter doesnt help!)

Am I correct in my simple thinking that if I sell my xyz shares at a loss of £12k this year and then get lucky next year with a sale of some abc shares which gain £24k on sale then no CGT is payable (shares not in isa and assumed CGT allowance is £12k)?

[Rajput1962]

Trying to understand the CGT lockin (mental financial overload from having to get to grips with CTF conversions to JISA for the kids,Voluntary NI contributions for me and a workplace pension for the daughter doesnt help!)

Am I correct in my simple thinking that if I sell my xyz shares at a loss of £12k this year and then get lucky next year with a sale of some abc shares which gain £24k on sale then no CGT is payable (shares not in isa and assumed CGT allowance is £12k)?

This is my thinking and why i posed the question. In my simple point of view it looks like VWRL and VEVE move in approximate tandem. So if I 'bank' the VWRL (or xyz) loss now and reinvest in VEVE (or abc) and then get lucky next year to the extent that the gain is much greater than £12k, then I can offset the extra above £12k in abc with the 'banked' loss from xyx which I hold outside of ISA/SIPP.

By doing nothing I think I would end up paying CGT on the extra gain above £12k.

I like the phrase ' move my CGT base upwards' mentioned in a post above.

[Rajput1962]

Like many investors, some of my investments are showing a loss - anything invested in the last couple of years. However, before the current rout all my investments were looking healthy; I have confidence that in time investments will recover because 'the stock market always does'. I'm mostly invested in index trackers so the market is what it is.

So here's my question: If i was to sell my VWRL and buy VEVE instead, i could lock in my VWRL loss to offset against any future gain in VEVE. Performance wise, they look similar (albeit VEVE has no EM) and both seem to go up and down at approximately the same levels. The discrepancy is small compared to the overall expected increase.

My thinking is that the loss could be offset against future capital gains tax. And then every year keep swapping between VWRL & VEVE
to optimise capital tax gains allowance, without being out of the market for any length of time.

What is the flaw in my logic?!

No, that makes sense. VWRL = 0.9*VEVE + 0.1*VFEM. The exact proportion of VEVE can be calculated from the percentages of US in VWRL and VEVE. It is cheaper to hold the combination of VEVE and VFEM.

I have recently sold two directly held UK shares to fill my CGT allowance, and used the proceeds to top up my holding of VFEM to its market weight. That has moved up the CGT base of my UK portfolio, which I would like to sell and buy a tracker. I could sell it now, but I do not like the current volatility or spreads.

I haven't thought about replicating VWRL and hence given no thought to VFEM. I was just trying to keep it simple so that I sell VWRL and buy VEVE as closely together as possible. The spreads have been as much as 50p earlier last week but narrowed to be nearer the more usual 10p. Whilst I've been watching and fretting about the 50p spread, the prices of both VWRL and also VEVE have moved up by several £s. So with hindsight even with the larger spread I would have full been better off making the trades - but then again we are all experts in hindsight!

[GeoffF100]

Like many investors, some of my investments are showing a loss - anything invested in the last couple of years. However, before the current rout all my investments were looking healthy; I have confidence that in time investments will recover because 'the stock market always does'. I'm mostly invested in index trackers so the market is what it is.

So here's my question: If i was to sell my VWRL and buy VEVE instead, i could lock in my VWRL loss to offset against any future gain in VEVE. Performance wise, they look similar (albeit VEVE has no EM) and both seem to go up and down at approximately the same levels. The discrepancy is small compared to the overall expected increase.

My thinking is that the loss could be offset against future capital gains tax. And then every year keep swapping between VWRL & VEVE
to optimise capital tax gains allowance, without being out of the market for any length of time.

What is the flaw in my logic?!

No, that makes sense. VWRL = 0.9*VEVE + 0.1*VFEM. The exact proportion of VEVE can be calculated from the percentages of US in VWRL and VEVE. It is cheaper to hold the combination of VEVE and VFEM.

I have recently sold two directly held UK shares to fill my CGT allowance, and used the proceeds to top up my holding of VFEM to its market weight. That has moved up the CGT base of my UK portfolio, which I would like to sell and buy a tracker. I could sell it now, but I do not like the current volatility or spreads.

I haven't thought about replicating VWRL and hence given no thought to VFEM. I was just trying to keep it simple so that I sell VWRL and buy VEVE as closely together as possible. The spreads have been as much as 50p earlier last week but narrowed to be nearer the more usual 10p. Whilst I've been watching and fretting about the 50p spread, the prices of both VWRL and also VEVE have moved up by several £s. So with hindsight even with the larger spread I would have full been better off making the trades - but then again we are all experts in hindsight!

With ETFs you also need to consider the discount/premium to Net Asset Value. Bloomberg gives a value for this, but it is not updated during the day. I expect professional traders have the real time value on their screens. Another possibility is to buy an OEIC, but the market could have moved a long way between selling the ETF and buying the OEIC.

[scrumpyjack]

One point to bear in mind if you have substantial capital gains is that it seems unlikely the rate will ever be lower than 20% and will probably go up at some point. There is an argument for taking it on the chin now rather than postponing it and paying a higher rate later on.

Of course if you keep them til you die there is no CGT on death!

[GeoffF100]

Trying to understand the CGT lockin (mental financial overload from having to get to grips with CTF conversions to JISA for the kids,Voluntary NI contributions for me and a workplace pension for the daughter doesnt help!)

Am I correct in my simple thinking that if I sell my xyz shares at a loss of £12k this year and then get lucky next year with a sale of some abc shares which gain £24k on sale then no CGT is payable (shares not in isa and assumed CGT allowance is £12k)?

This is my thinking and why i posed the question. In my simple point of view it looks like VWRL and VEVE move in approximate tandem. So if I 'bank' the VWRL (or xyz) loss now and reinvest in VEVE (or abc) and then get lucky next year to the extent that the gain is much greater than £12k, then I can offset the extra above £12k in abc with the 'banked' loss from xyx which I hold outside of ISA/SIPP.

By doing nothing I think I would end up paying CGT on the extra gain above £12k.

I like the phrase ' move my CGT base upwards' mentioned in a post above.

That does not make sense. Suppose VWRL is currently showing a £12K loss. Suppose you sell VWRL to realise that loss and buy an equivalent investment. Suppose that equivalent investment shows a £24K profit next year. Yes, there will be no tax to pay, because you have the tax loss. Nonetheless, if you had just held VWRL, it would now be in profit by £12K, so, again, no tax.

Realising a tax loss makes sense only if you have or will have other gains to offset against it. Swapping VWRL for an equivalent combination of VEVE and VFEM, would reduce your ongoing costs, as I have said. Nonetheless, you could lose money on the transaction, and you may not be able to use your tax loss before it expires.

In my case, the main motivation was to fill this year's CGT allowance to make one of my portfolios more loss making. I was lucky with the spreads and discount.

[PinkDalek]

It seems we can carry forward losses for up to 4 years so you need to bear that in mind ...

Sorry to interject but you are thinking of the time limit for claiming capital losses.

https://www.gov.uk/capital-gains-tax/losses

... you can claim up to 4 years after the end of the tax year that you disposed of the asset.

There is, at present, no limit as to how long one can carry forward such losses (although they’d, in effect, be lost on death).

Things are changing with regards to companies though from April Fools’ Day 2020:

https://www.gov.uk/government/publications/changes-to-the-corporate-capital-loss-restriction-for-corporation-tax-from-1-april-2020/changes-to-the-corporate-capital-loss-restriction-for-corporation-tax-from-1-april-2020

[Dod101]

Thanks PD. I seldom have had losses in recent years and will be using my loss this year against gains made earlier in the year so there will be no carry forward for me.

Dod

[Dod101]

[
... you can claim up to 4 years after the end of the tax year that you disposed of the asset.

There is, at present, no limit as to how long one can carry forward such losses (although they’d, in effect, be lost on death).

Things are changing with regards to companies though from April Fools’ Day 2020:

https://www.gov.uk/government/publications/changes-to-the-corporate-capital-loss-restriction-for-corporation-tax-from-1-april-2020/changes-to-the-corporate-capital-loss-restriction-for-corporation-tax-from-1-april-2020

Yes I was thinking of capital losses. Is that not what we are discussing? Certainly in my case I have a big capital gain and a relatively smaller loss which I understood I could carry forward for up to four years. I will though use it in this year's tax return to offset some of the capital gain so it is academic for me.

Dod

[PinkDalek]

I’m confused by your second reply but you may have missed the part I wrote at the start of my reply, ending with ‘claiming capital losses’. Yes I’m talking about capital losses but you again seem to have stated a 4 year carry forward time limit that doesn’t exist.

Please read the link provided. The first one that is. The second was thrown in as an aside.

Edit: Current tax year capital losses have to be used anyway in the situation described (unless I’m losing my marbles)

[EthicsGradient]

I’m confused by your second reply but you may have missed the part I wrote at the start of my reply, ending with ‘claiming capital losses’. Yes I’m talking about capital losses but you again seem to have stated a 4 year carry forward time limit that doesn’t exist.

Please read the link provided. The first one that is. The second was thrown in as an aside.

Edit: Current tax year capital losses have to be used anyway in the situation described (unless I’m losing my marbles)

I think the point is, from that gov.uk site:

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.

There’s an exception for losses made before 5 April 1996, which you can still claim for. You must deduct these after any more recent losses.

If that should mean "you have 4 years to inform HMRC of a loss, but after you've done that, you can hold off actually using it in a tax return for as long as you'd like", then it's confusing and very badly put. I'd read that to mean "the claim can be up to 4 years after the end of the year you disposed of it", especially with the qualifier about 1996.

I think the important thing to say about capital gains tax is that if you think you'll have significant gains in the future, then always use the allowance in each year, because you can't carry that into a new year. If you have assets with some gain that you reckon could be changed for something with better prospects, then sell those first and buy the new stuff; if you still have some allowance left after that, and you can buy an equivalent (or move the proceeds into an ISA using that year's allowance, which could allow you to buy the same thing), then do that up to the limit.

If the total proceeds are below 4 times the yearly allowance (ie £48,000 this year) and the total gains are under £12,000, then you don't have to put it on your tax return, which saves some hassle (though you'll have to know the gain anyway - if your broker knows every detail of all purchases, reinvestments of dividends etc. and has worked it all out for you, that's great).

If there are investments you'd like to change for better performing ones, but they're still sitting on a gain above £12,000, then it can become worth selling others at a loss to allow you to do it all now. That was the position I was in a few days after the market started falling (I had already used this year's allowance), but it then fell enough that the gains I had on funds I didn't like are now well under £12,300, so I'm going to wait until the new year for that.

[PinkDalek]

If that should mean "you have 4 years to inform HMRC of a loss, but after you've done that, you can hold off actually using it in a tax return for as long as you'd like", then it's confusing and very badly put. I'd read that to mean "the claim can be up to 4 years after the end of the year you disposed of it", especially with the qualifier about 1996.

I think the important thing to say about capital gains tax is that if you think you'll have significant gains in the future, then always use the allowance in each year, because you can't carry that into a new year.

I was avoiding going into detail on here, as Taxes practical has plenty on the subject (although hard to find, I've located a fairly recent one as marked *** below), but I was attempting to make two broad points:

1. Ignoring the 1996 qualifier, in order to benefit from any Capital Losses they have to be claimed (or otherwise notified to HMRC) up to 4 years after the end of the tax year that you disposed of the asset which is I think what you are saying.

2. The part I've underlined above may be misunderstood.

Using losses to reduce your gain

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.

From https://www.gov.uk/capital-gains-tax/losses

If the total proceeds are below 4 times the yearly allowance (ie £48,000 this year) and the total gains are under £12,000, then you don't have to put it on your tax return, which saves some hassle

There are exceptions to this, such as if in the tax year concerned you are using current year Capital Losses to reduce you net losses to under the CGT Annual Exempt Amount then those losses still need to be claimed and reported.

*** Bear in mind that 4 x the Annual Exempt Amount is non statutory, as pointed out by scrumpyjack in one of those prior Topics I mentioned at Taxes:

viewtopic.php?p=271564#p271564

[JohnW]

The logic might be ok, but what about 'regulatory risk'? They change the tax laws to disallow old capital losses. They could change them to your advantage of course.

[Lootman]

The logic might be ok, but what about 'regulatory risk'? They change the tax laws to disallow old capital losses. They could change them to your advantage of course.

My completely speculative answer would be that any such change would be phased in, allowing for a period of time in which such losses could be used to offset gains. Tax laws are generally not retrospective and in effect disallowing past losses would exhibit an element of retrospection.

What I think is more likely is an increase in CGT rates in the future or a reduction in the annual CGT-free allowance. Either of those would make rolling losses more useful. That said, I much prefer to use my losses in the tax year they arise. And I generally sell positions showing a loss at the end of each tax year. I haven't had any losses in the last few years so that has been moot, but not surprisingly I do have a few to be sold off in the next few days. Still plenty of gains to offset them against.

[Bouleversee]

I'm glad we've sorted that out. Dod had me worried for a minute as I have claimed losses c/f from many years ago in addition to many as yet paper losses. My problem is finding enough gains to set them against now, especially as most of my investments are in ISAs. I was just about to get around to reducing the non-ISA shares remaining when Covid-19 struck and wiped out most of my gains. However, I had better get on with I and see what can be salvaged. Finding the time is the problem. Many thanks to PD for calming my nerves.