Seven ways to use stock market falls to benefit your finances

From drip-feeding to tax and pensions, Hannah Smith examines how you can use falling markets to your advantage when it comes to financial planning.

Global stock markets looked to have bounced back from a torrid February and March, but yesterday’s sharp drop in the FTSE 100 warned investors there could be more turbulence to come. But it’s not all bad. There are ways you can use falling markets to your advantage when it comes to financial planning.

1) Top up your positions

Take advantage of lower share prices through drip-feeding into the market, suggests Tony Byrne, managing director of Wealth and Tax Management. “We have been advising our clients to drip feed into investments over the next three months in order to benefit from pound-cost averaging. I know it looks like timing the market, but no one knows what is going to happen next,” he says.“What we do know is that prices are about 15% lower than they were six weeks ago, a further large fall is highly likely after a rally but we don’t know when. US shares in particular are way over-valued. If prices take a further fall to below the previous low point recently, clients will be buying shares very cheaply and will benefit from the subsequent rally. This is based on the usual pattern of stock market crashes throughout history.”

2) Look at rebalancing

Now is a good time to look at your portfolio and make sure that it still lines up with your goals and risk appetite.

“For existing investments, consider rebalancing the portfolio to bring it back into line with the originally desired allocation, while selling high and buying low,” says Sam Blanning, IFA at Star House Financial Services. “You do need the stomach to sell investments which have done well and put more money into ones that have done badly.”

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3) Make your ‘bed’

You could do something called a ‘bed and Isa’ while values are lower, says Scott Gallacher of Rowley Turton Private Wealth Management. This means you could effectively sell more units in ‘unwrapped’ investments to realise the £20,000 Isa allowance, and then use this money to fund Isa contributions for the current tax year.

“Assuming values eventually recover, that profit will be tax-free within the Isa rather than potentially subject to capital gains tax outside the Isa,” he adds.

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This also works for pensions, as Paul Matthews, chartered financial planner at DGS IFA, explains: “I am using the market correction as an opportunity to ‘bed and pension’ clients who hold unwrapped collectives. This enables clients to lock in the sale of their Oeic or unit trust investments at a lower value, decreasing any potential capital gains tax (or even locking in losses to carry forward) and reinvesting into a pension where there is scope to do so.

“The tax relief would increase the initial pension contribution and any future rise in the markets would effectively be geared by this uplift. Any further short-term market corrections would also be offset by the benefit of the tax relief.” 

4) Reclaim inheritance tax

Your family could reduce their inheritance tax bill on your estate by selling investments within 12 months of your death and reclaiming IHT.

IHT is calculated based on the value of assets at the time of death and is normally payable within six months. In most cases, it must be paid before the assets can be handed over to the family, explains NFU Mutual chartered financial planner Sean McCann.

If the executor sells any qualifying investments including shares quoted on the stock market, unit trusts and Oeics within 12 months of the death at a lower price, they can reclaim the IHT paid on the loss of value. The sale and the reclaim must be made by the ‘appropriate person,’ who is normally the executor. If the investments passed on to family members who then sell, the reclaim isn’t available.

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There are other traps to look out for: all the investments sold by the executor are aggregated. If some of them have increased in value, this will reduce the amount of IHT that can be reclaimed.

“One option open to executors is to pass those investments that have increased in value direct to family members and only sell the investments that have fallen in value, to maximise the amount that can be reclaimed,” McCann says. “There’s a similar relief available on houses sold at a lower value within four years of death. If house prices begin to fall, it’s important that families are aware, as rebates aren’t given automatically and need to be claimed.”

5) Give gifts

Rowley Turton’s Gallacher suggests that giving gifts could be a good idea now while values are lower. “If you are considering gifting investments to children, for example, then today's lower values compared to pre-crash will allow you to pass more units or shares to your children as part of the annual £3,000 gift allowance, or as a potentially exempt transfer or chargeable lifetime transfer if gifting via a discretionary trust.

“Any profits from a market recovery will then be outside your estate for inheritance tax purposes. Those gains might be subject to capital gains tax depending on the child's own tax position but, as CGT rates are lower than IHT rates, this should still give a tax saving.”

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6) Rethink your divorce settlement

After market falls, divorce settlements might be lower if one half of a splitting couple has seen their investments hit and the other has more cash assets, says Gallacher. “So if Mr A had a £500,000 stock portfolio and Mrs A had £500,000 on deposit, pre-crash they might have agreed to keep their own assets. Now, if Mr A's portfolio is £400,000, he might be arguing for £50,000 from Mrs A to share their assets.”

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7) Save cash, don’t panic

Mortgage introducer and protection adviser Nicola Mitchell of Mitchell Moneypenny suggests people should not make decisions based on short-term market movements, but instead maintain some savings in cash and pay down debt.

“When the market falls, there is never any certainty over when it will start improving or whether further downside is likely, and the most important thing to remember is that you should never make decisions based on short-term price movements. With economic or political volatility, it is likely there will also be significant volatility in exchange rates, currency valuations and base rates, which can dictate the cost of borrowing and the interest for savers.

“In such complex times, remember to keep some money as a safe haven, in a deposit account which has protection from the FSCS. Most of all, don’t panic. Pay off debts that you have starting at those with the highest interest rates, and seek out longer-term low fixed-rate deals on mortgages, loans and credit cards, which may not last long but offer a lock-in.”