We thought bank shares had hit floor six months ago. What should we do?

Q. My wife and I have AIB and Bank of Ireland shares that we bought about six months ago in the expectation that the stock has reached its floor. We were obviously very wrong. I have now huge paper losses on these stocks. Should I sell them and realize a loss which presumably I can offset against my tax? Can I use the paper loss in any way if the selling the shares now makes no sense?

The answer to the tax question is simple. If you sell the stocks and make a loss, then the loss can only be used against other capital gains. It absolutely cannot be offset against other amounts that are subject to income tax. Paper losses cannot be used until such time as the stocks are sold crystallizing the loss.

The wider question is whether you should sell the stocks now. If you sell the stocks now you are taking the view that either:

— the stocks are still on the way down and that by selling now you can buy them again when they have reached the floor and therefore participate to a larger extent when the stocks start to recover. If of course you get this wrong you could end up selling stock that costs you more to repurchase when they start to recover

or

— the stocks are going to fall further and recovery in those stocks is unlikely in the medium term and that you see recovery happening in other sectors of the market

Nobody can tell you which way banking stocks will go. The general consensus is that Irish banks are unlikely to fail. The Financial Regulator keeps the Irish banks under close scrutiny so they are well regulated. Hopefully, this will provide an early warning sign if a bank is getting into difficulties so that cash can be injected into the bank either by loan or investment, or a deal can be brokered for the takeover of the bank by another institution by way of a share deal similar to the Lloyds TSB /HBOS deal. If you buy into that argument then you would also be taking the view that the banks’ stocks will rise when the effect of the sub prime crisis and credit crunch have washed through as the fundamentals of the banks are strong

If that it the case then it would be worthwhile considering gifting those shares to your children (if you have any ). If your shares are worth €50,000 now then you could transfer them free of capital acquisition tax assuming that you had not used the full €521,000 tax free amount on a parent to child transfer. If those shares rose to €150,000 in a few years time when hopefully markets recover, then your children will have got €100,000 of capital growth with no CAT cost whatsoever and no erosion of the parent/child threshold. The same applies to other assets such as residential houses.

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