How to get value out of loss-making shares

While the stock market has recovered 50 per cent from last year’s low – and even the crisis-hit banks have returned to profit – private investors could still be sitting on heavy share losses, a full three years on from the start of the credit crunch.

The share prices of a range of widely held blue-chip UK companies remain more than 40 per cent lower than August 2007, against a 15 per cent fall in the FTSE 100 index overall.

BT, Marks & Spencer, Aviva and British Airways are at about half their previous levels, while Lloyds Banking Group – which, with 2m shareholders, is the UK’s widest held stock – has lost 73 per cent in value.

Shareholders in the former HBOS, which was rescued by Lloyds in the depths of the crisis in 2008, are still down about 95 per cent, while holdings in high-profile failures Northern Rock, Bradford & Bingley and Woolworths have lost all value.

Tim Norkett, national head of private clients at Horwath Clark Whitehill, the accountants, says: “The numbers are better than they were, but some investors are still showing substantial losses.”

Stockbrokers say that investors should realise that, in certain cases, they may never make their money back.

Jonathan Jackson, head of UK equities at Killik & Co, the advisory broker, points out: “If you’re in a bank that’s fallen 90 per cent – RBS, for example – which then trebles, you’re still 70 per cent down.”

Equally, where shares have lost half their value, they would need to rise 100 per cent for investors to get back to their starting price.

Jackson says that “doubling up” – putting more money into a holding that has fallen heavily – could make sense in some cases for speeding the recovery of earlier losses.

However, with certain companies, the best advice might be to sell and “move on”.

Advisers say that while investors are often reluctant to crystallise losses on shares that have fallen heavily, they should consider the likelihood of recovery and whether any remaining value could be better employed elsewhere.

The “silver lining” to these losses is that they can be used to offset capital gains tax (CGT) liabilities at the new higher rate of 28 per cent, introduced in June.

Lee Smythe, managing director of Killik’s financial planning arm, says that many holders of loss-making financial and other shares may have also doubled their money in mining shares over the last couple of years, giving them profits in excess of the annual CGT exemption of £10,100.

“There’s little point in sitting on big losses elsewhere, while realising such gains,” he says.

For every £1,000 of gain above the CGT allowance that can be offset, a higher-rate taxpayer will save £280 in tax. And while investors need to sell to crystallise a loss for CGT purposes, this does not mean having to get rid of holdings altogether.

In the past, private investors could carrry out “bed and breakfasting”, which involved selling holdings but buying them back the next day to create gains and losses for CGT purposes. But now, for the transaction to realise a gain or loss for CGT purposes, investors must generally wait 30 days to buy back a holding – which creates timing risk.

Where an investor sells and then buys the shares back through an individual savings account (Isa) or self-invested personal pension (Sipp), this time bar does not apply.

Smythe says such “bed and Isa” and “bed and Sipp” transactions have a number of attractions: “You get the loss in the bag and then future gains are tax-free”.

Another way to sidestep the 30-day rule is to use the sale to rebalance a portfolio by changing holdings, sometimes called a “bed and sector”. For example, some brokers favour selling RBS for Lloyds to create a tax loss while retaining exposure to a bank with potentially better recovery prospects.

Similarly, with a loss-making investment fund, by switching into a lower-cost exchange traded fund (ETF), an investor could notch up some tax savings while moving to a lower-cost investment vehicle.

Norkett also suggests “bed and spouse” transactions – with one partner selling and the other buying back at the same time – to create losses for CGT purposes allowing a couple to retain the same overall investment exposure.