Stock market volatility presents opportunity for gifting assets

As economic shocks send ripples through global markets, the value of some companies’ shares have been significantly affected, with trillions being wiped off the global stock markets in early April.

The global economic uncertainty caused has created winners and losers across various sectors. Companies in consumer staples, healthcare, and discount retail have seen their share prices rise as investors seek safer bets. Conversely, technology, manufacturing and luxury goods have suffered significant losses. Whilst markets appear steadier now than in recent weeks, significant uncertainties still lie ahead and it may take some time for the markets to fully stabilise.

Many taxpayers may be wary to review their investment portfolios at the moment, but it could prove to be a beneficial time for some to do so, in particular those who are thinking about making gifts to manage their inheritance tax (IHT) exposure. Following the announcements of proposed changes to IHT in the Autumn Budget 2024, many have been spurred into reviewing their estate planning. Whilst we may be in the eye of a stock market storm, it could be a perfect time for making gifts.

Gifting assets (such as shares) to family and friends, or into a trust, can trigger tax charges from an inheritance tax (IHT) and capital gains tax (CGT) perspective. The value of such assets for tax purposes is broadly determined based on 'the price which those assets might reasonably be expected to fetch on a sale in the open market'.

Many will be aware of the rule that if an asset is gifted to someone else, the gift usually needs to be survived by seven years to be fully exempt from IHT. What is sometimes overlooked is that it is the value of the asset at the time of the gift that is important in calculating that IHT exposure. Any growth in the value of the asset following the gift is fully outside the scope of IHT for the person making the gift. Gifting shares at a depressed value might quickly lead to potential IHT savings as a result.

This will particularly be the case for individuals with shares in sectors negatively impacted or in family investment companies where the company value is driven by listed investments. Though the initial economic impact has been on listed company share prices, it is likely most companies will be affected in some way through disruptions in supply chains, increased costs and changes in consumer behaviour.

Whilst gifting assets now could potentially reduce the size of an individual’s taxable estate, it is essential that the valuations of such assets are documented in the event of a later query from HMRC. This could be particularly challenging where the company is not listed on a stock market.

It is worth bearing in mind that from a tax perspective, it is necessary to consider what a hypothetical purchaser would pay for an asset. This means that where fluctuations in value are very short-term and the company’s value has stabilised before the gift is made, any short-term reduction in value may not be taken into consideration by the hypothetical purchaser. They may instead consider maintainable profits and it would be wrong to assume that just because the share price of large listed businesses has fallen recently, this will automatically mean that smaller companies will have a similarly depressed value.

Ultimately, for those who want to gift assets that do not have an easily identifiable market value, it’s essential to seek professional advice to navigate these rules and ensure the estate planning aligns with the desired goals.