A question from a reader: Dear Monevator. I have an old investing book/bible that tells me I should be ‘bed & breakfasting’ my shares to reduce taxes. However is this even still possible in the era of Airbnb? (Just joking!) Seriously what is bed and breakfasting shares and is it still legal/possible as I haven’t seen you write about it?
So-called bed and breakfasting was a now-defunct method to help you reduce your UK capital gains tax  (CGT) liabilities.
In the olden days when avoiding taxes  was still mostly a sport for posh boys from the Home Counties, you could sell a fund or tranche of shares you owned one day to realize a capital gain – ideally a gain that was less than your annual CGT allowance – and then buy back the same fund or shares the next day.
Like this, you could reset your cost base, and so defuse the future capital gains tax liability you were building up as your fund or shares grew in value.
What a wheeze!
Often people would do this bed and breakfasting at the very end of the tax year – selling on the last day of the tax year and then buying back the next day.
The idea was to make use of your annual CGT allowance without you having to lose exposure to an investment you presumably wanted to keep (since you only sold it to defuse the CGT).
No more bed and breakfasting CGT
Bed and breakfasting was a simple way to help prevent moderately-sized gains from becoming liable for tax by defusing  a portion of the gains each year.
Alas it was long ago stopped by tighter rules about when you can repurchase the same asset for the disposal to count as a taxable sale.
In short, nowadays you can’t sell and then buy back the next day to defuse CGT.
Instead you must leave a 30-day period between buying and selling the assets in order to crystalise that CGT gain.
That’s not so much bed and breakfasting as bed and hibernating!
Alternative ways to reduce pregnant capital gains liabilities
There are still alternatives to bed and breakfasting that exploit the same general idea of using up your CGT allowance.
They are not perfect swaps, however:
- Bed and ISA: You can sell a fund or shares outside of an ISA and then put the money you raise into an ISA. Within the ISA you can repurchase exactly the same assets if you want to. The 30-day rule doesn’t count with respect to these ISA purchases. The obvious snag here is your annual ISA allowance is limited in size, which restricts how much bed-and-ISA-ing you can do in a particular year.
- Bed and SIPP, Bed and spreadbet, and so on: You can apply the same principle of Bed and ISA to several other investment vehicles that give you the same exposure but do not violate the 30-day rule. Be careful not to let ‘the tax tail wag the dog’, as they say. (For example, money put into a SIPP can’t come out until you draw your pension, and spreadbetting to avoid CGT  has additional risks for the unwary).
- Bed and spousing: Married couples and civil partners can keep an investment within the family while crystalising a gain by having one partner sell the asset, and the other party simultaneously buy it back with a different broker.
- Give and take: Legally sanctified couples should also look into gifting each other assets, since such gifts are made at cost rather than market value as would otherwise be the case. Such swapping can be handy if one spouse is likely to have some capital gains tax allowance to spare or if they pay a lower tax rate; they may still face a taxable gain when selling the assets, but they may pay less tax when they do so than the other partner would. (I should confess that as a
lonely misanthropeirrepressible singleton, I’ve only ever read about  these arcane ceremonies).
- Bed hopping: There’s nothing to stop you selling one asset to use up your allowance and then buying something similar but different with the proceeds. You could sell your shares in big oil outfit Royal Dutch Shell, say, and then buy shares in BP. Obviously you’re now invested in a different company, but you’ll still retain exposure to an oil major. (A safer alternative, given company-specific risks, might be to buy shares in an oil exploration ETF.) Another example would be to sell an actively managed emerging markets fund and then buy an emerging market tracker.
- Bed down for a month: You could sell a company’s shares that you’ve made a good gain on, and then roll the proceeds into an index tracker . After 30 days are up you could sell down your holding in the tracker and re-buy the original shares if they still looked good value.
Make sure you keep track of all these trades in case you need to report them to HMRC.
Worth doing, but better avoided
There’s a cost to churning your portfolio like this (and it’s not just heartburn). Share dealing fees may be low these days, but stamp duty of 0.5% on most share purchases will make a dent into your capital. There are bid/offer spreads, too.
What’s more, if you plan on doing a return trip after 30 days then that’s going to double your costs again. (You could just sit in cash, in that case. But then you risk the market moving against you.)
It’s always best to invest in an ISA or pension  where possible, as this keeps your investments shielded from CGT entirely. Start young and you can build up a substantial ISA portfolio, despite what many high earners seem to consider to be fairly modest annual allowances.
Some people do have big portfolios outside of tax shelters for one reason or another though. Maybe they’re rich, or they’re obsessed  with investing.
If that’s you, then you should definitely try to use your annual CGT allowance to help stop tax eating up  your returns in the future.
See my article on avoiding capital gains tax  for more ideas.