My parents are in their late 70s and fortunate enough to be reasonably comfortable financially. They were always planners and have for some time been thinking about ultimately passing on assets to myself and my brother and our families.
The current issue I’ve been debating with my dad is about some shares he owns. He has an unrealised gain of circa €50,000 on one company’s shares, and an unrealised loss of circa €50,000 on a different company’s shares. He is considering selling the shares of each so that he can use the losses on one share to avoid tax on the gain in the other.
The question is whether there is any point, as he does not "need" this cash. I believe he is under the misconception that the value paid for the assets we ultimately inherit is relevant, when in fact the only thing that matters is the value of them when we inherit them.
In my opinion, he should not act now if the only reason to do so is for estate planning reasons but I would appreciate your opinion and advice.
Mr C.B., email
As you say, when your father dies, any shares (or other assets) he owns will form part of the estate and they will be valued at whatever they are worth at that point. What he paid for them will be irrelevant at that point...to the estate and to anyone inheriting.
If his exercise in selling shares that are currently at a loss to the price he paid is simply to offset gains elsewhere that he fears might lead to a tax bill on someone when he dies, he is mistaken. Capital gains die with the owner of the asset.
If he has shares purchased at €100,000 and they are now worth €150,000, he currently faces a capital gains tax bill of €16,081 – 33 per cent tax on the €48,730 gain he has made, allowing for the €1,270 capital gains tax exemption (assuming he has not already used it this year).
All that also supposes the shares were bought in 2003 or more recently. If it was before that, indexation comes into play which would reduce his capital gain and his tax bill.
If he were to die today, the shares are still valued at €150,000 but there is no capital gains tax liability as that dies with him.
Similarly, any loss on his other shares become irrelevant when he dies. They cannot be used by anyone else to reduce a tax bill. Losses also die with the owner.
Investment call
The conversation he should be having with himself is whether he should sell the lossmaking shares now because he considers they have no future prospect of making up that lost ground and are, in fact, likely to lose more of their value. That's an investment call that only he can make.
However, in the event of his death, any capital loss outstanding from this or other asset sales would also die with him even though the loss was actually crystallised by the sale of the shares or other assets – and not just notional as it is at present.
During his lifetime, he can use the loss to offset other gains in his portfolio in the same tax year. If not used in full in the same tax year, capital losses are carried to offset against gains made on the sale of assets in future years, but before his death.
As it is something regularly asked, I should also clarify that you cannot use capital losses to claim refunds of capital gains tax already paid in previous years by offsetting them retrospectively against those capital gains, except in very limited circumstances.
For losses incurred in the year someone dies, section 573 (3) of the Taxes Consolidation Act 1997 allows them to be set against taxable gains over the previous three years if there are insufficient gains in the year of death for offsetting.
Generally, losses can be used only from the point they materialise going forward.
If he does decide to sell at a loss on the basis of his assessment of the future prospects of the asset, he might reasonably look to sell some other asset to avail of those losses, especially if he considers the other asset to now be fully valued and likely to retreat from its current values.
But as far as death is concerned, it is final for the valuation of assets: gains are irrelevant in tax terms, losses similarly, and crystallised losses also die with him.
Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2, or email dcoyle@irishtimes.com. This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into
