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Alternatives to bed and breakfasting to reduce CGT

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 [1] (CGT) liabilities.

In the olden days when avoiding taxes [2] 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 [3] 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:

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 [7] 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 [8] with investing.

If that’s you, then you should definitely try to use your annual CGT allowance to help stop tax eating up [9] your returns in the future.

See my article on avoiding capital gains tax [10] for more ideas.