A question from a reader about ‘bed and breakfasting’ – and she’s not talking about English muffins versus the continental options:
Dear Monevator,
I have an old investing book/bible that tells me I should be bed & breakfasting my shares to reduce taxes. Is this possible in the era of Airbnb? (Just joking!) Seriously what is bed and breakfasting shares? Is it still even legal as I don’t think you’ve written about it?
Yours,
A. Reader
Dear reader! So-called bed and breakfasting was a now-defunct method to help you reduce capital gains tax on shares (CGT).
In the olden days – when mitigating taxes was mostly a sport for retired stockbrokers in the Home Counties – you would sell a fund or tranche of shares you owned one day to realise a capital gain – ideally for less than your annual CGT allowance – and then buy back the same fund or shares the next day.
Doing so reset your cost base. Which, in turn, defused the future capital gains tax liability you were building up when your fund or shares rose in value.
What a wheeze!
People typically did their bed and breakfasting at the end of the tax year. They’d sell on the last day of the tax year and then buy back the next day.
Bed and breakfasting enabled you to make use of your annual CGT allowance without losing exposure to an investment that 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 operation. But it cunningly helped prevent moderately-sized gains from becoming liable for tax by defusing a portion of the gains each year.
Alas the whole scheme long ago went the way of paying urchins to sweep your chimney. Bed and breakfasting was crippled by tighter rules about when you can repurchase the same asset if the disposal is to count as a taxable sale.
In short: nowadays you can’t just sell and buy back the next day to defuse CGT.
Instead you must leave a 30-day period between buying and selling the same assets. Any less and you haven’t crystalised the CGT gain from HMRC’s perspective.
Thirty days! That’s not so much bed and breakfasting as bed and hibernating!
During those four and a bit weeks, of course, the value of your investment will fluctuate. So you could miss out on gains. (Or losses…)
What’s more, the CGT allowance has been cut and cut again in recent years. This means there’s much less headroom for defusing gains anyway.
On the other hand, we do enjoy a generous £20,000 annual ISA allowance.
And ISAs are entirely impervious to tax, which means that over the years you can build up a chunky tax shelter to hold your assets inside and never worry about CGT anyway.
Alternatives to bed and breakfasting to reduce CGT liabilities
If you do still hold assets in general investment accounts – i.e. outside of ISAs and pensions – then there are other options to bed and breakfasting, which exploit the same general idea of using up your CGT allowance to defuse gains.
They are not perfect swaps, but you could:
- Bed and ISA: You can sell a fund or shares you hold outside of an ISA and then put the money you raise into your ISA. Within the ISA you can repurchase exactly the same assets if you want to. From then on it can grow without concern for the taxman, like anything else in an ISA. The 30-day rule doesn’t count with respect to these ISA purchases. The obvious snag is your annual ISA allowance is limited in size. That 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 other investment vehicles that give you the same exposure but do not violate the 30-day rule. But 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. Meanwhile spreadbetting to avoid CGT has lots of risks for the unwary).
- Bed and spousing: Married couples and civil partners can keep an investment in the family when crystalising a gain by having one partner sell the asset, and the other party simultaneously buy it back under their own name in their own account.
- Give and take: Legally sanctified couples can also look into gifting each other assets. Such gifts are made at cost – rather than market value as would otherwise be the case. Swapping assets like this 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 could 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 firm 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. Another example would be to sell an actively managed emerging markets fund and then buy an emerging market tracker. You can even swap global tracker funds from different management houses. (The latter is a slightly grey area. Perhaps choose funds that track different global indices for a belt-and-braces approach.)
- Bed down for a month: You could sell shares that you’ve made a good gain on, and then roll the proceeds into an index tracker. After 30 days you could sell some of the tracker to fund a repurchase of the original shares if they still looked good value.
Keep records 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 – or even zero – 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. But then you risk the market moving against you.)
Again, it’s always best to invest in an ISA or pension where possible. This keeps your investments shielded from CGT entirely. Start young and you can build up a substantial ISA portfolio, while annual pension contributions can currently be up to £60,000, if you earn enough. Though who knows how long before the politicians meddle with pensions again.
Some people do still have big portfolios outside of tax shelters. Maybe they’re rich, or they’re obsessed with investing. Or perhaps a lump sum like an inheritance overwhelmed their limited annual allowances.
If that’s you, then the methods I’ve talked about above are worth doing to prevent taxes eating up your returns in the future.
Morning all! I have bitten the bullet and earmarked a bunch of ancient posts to update with current capital gains tax rates and other quirks. So there may be some more of these to come tomorrow, and possibly on Thursday also. Pace yourselves! 😉
Some years back my plan was to sell shares in Alliance Trust and buy shares in Second Alliance Trust. But I was never rich enough to need to do it. And now the two have merged. Boo-hoo.
It might be interesting to look at the various Investment Trust investment schemes to see whether free trading would be available for such stunts.
Scroll down to page 42.
http://www.theaic.co.uk/sites/default/files/statistics/attachment/AICStats28Feb17.pdf
About Bed and Spousing, ” buy it back with a different broker.”..I think you can buy it at the same broker. Also, you seem to have missed out Bed and SIPP, Bed and Spreadbetting(the same share), Bed and CFD(the same share). The shares in Spreadbetting/CFD are treated as different for CGT purposes.
For indices/ETFs, one can buy index futures or a different ETF tracking the same index.
@Nandan — I have seen comment that you could buy back from the same broker, but it seemed to me to be pushing the spirit of the rules a bit. Perhaps “or a different account with the same broker” would be a good compromise?
I have no experience (as I mentioned in the article) with shared accounts/assets or spouses for that matter, and welcome guidance on this from those who do.
Fair comment on the laundry list, I just didn’t want to clog it all up. I’ll add a few words to point out the gamut of alternatives.
Does anyone know how ‘give and take’ works with joint ownership (with spouse) of a portfolio of funds (presumed 50/50 ownership but not sure if this is written anywhere), particularly where one partner has carried forward losses to set against CGT but the other does not?
I was looking into this recently and it seems to be a bit easier for ‘share’ like stuff (shares, ETFs, ITs) rather than ‘fund’ type stuff. Brokers seem to be set up to offer the service for shares only leaving you to do it ‘manually’ for funds, i.e. do your own selling then buying. I think its hard to minimise the time out of market for funds.
Doesn’t really matter if you’re thinking of leaving it 30 days anway, but it is a bit of an issue otherwise..
I plan to switch between Black Rock Europe tracker MKYAAO and Fidelity Europe tracker FIAAGV as my B&B next year.
Remember that if the sales are less than 4*allowance (ie 44400) you only need to mention them on a tax return if there is a taxable gain. If sales are above that you need to report them even if there is no tax to pay.
So say I had some money in “Vanguard Lifestrategy 80%” fund and switch that into “Vanguard Lifestrategy 60%” fund… does that defuse CGT?
What about switching from “Vanguard Lifestrategy 80% Acc” to “Vanguard Lifestrategy 80% Inc”: does that defuse CGT?
Bed and Spousing is very easy with Hargreaves Lansdowne. I’ve just done it recently.
You just send them a secure message saying how may shares of a holding you wish to transfer and they take care of it for a small sum, I think it was £12.50?
@Alex. That’s my question and no-one including my accountant seems to know for sure. Don’t take the following as Gospel but I believe (but am not certain) that income and equity units of the same fund wouldn’t count as substantially different. Probably two funds that tracked the same index eg Vanguard FTSE All share and say Fidelity All share wouldn’t count as different. But Almost certainly the Vanguard 60 vs Vanguard 80 would count as different. And Vanguard 100 vs iShares MSCI world etc definitely would count as would FTSE All share vs FTSE 250. Two points though. In portfolio terms for 1 month it doesn’t matter at all if you just move to a completely different tracked index. ET Say Sell FTSE 250 and move to iShares World or for that matter Emerging markets in risk terms just isn’t worth worrying about. Also the post highlights one really big advantage of index investing in that the index rises much more slowly than any single individual share might. So with an index tracker you only have to think about annual CGT gain harvesting once you have well over 50K invested outside an ISA. If you hold an inevitably less well diversified portfolio of individual shares with greater volatility then you will be having to bed and breakfast quite a bit more often.
One of the difficulties with using your pension is working out how much you’re actually allowed to pay in. There are the annual and lifetime allowances. Those, I’ve found relatively easy to understand.
But then you can only pay in as much as your “relevant income” (basically, gross salary, as I understand it), in your own personal contributions. So e.g. if you earn £30,000, your own contributions can’t be more than that.
Next complication: If you earn e.g. £39,000, it may be that your contributions were £39,000, but adding your employer’s takes you over the £40,000 annual allowance. That is ok if you have annual allowances from the last three years to carry forward and offset any excess…or is it? One advisor suggested to me that if you earn less than £40,000, you can’t use carry forward at all.
And for anyone who has contributed to a defined benefit pension, it’s hard to work out how much your personal contributions amount to. Pension administrators seem only to be able to work out a total input amount for employer and employee. All very confusing.
I sold some tracker funds (various from the Fidelity index range) and re-invested into equivalent ETFs (ishares and HSBC) …..so Fidelity Index US into HSBC S&P500 and so on. My broker is Fidelity.
My account statement shows that I have crystallised a realised capital gain for this year. Any subsequent growth, post switch, is listed on my statement as an “unrealised gain”. Does this mean I reset to zero for ongoing CGT or might my statement be lying to me and I could be in for nasty surprises down the line?
@Alex , @Adrian Steele Please see below
1. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51560 :
Clearly it says the shares must be of the same class.
2. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg50203
This defines what a class is.
3. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709
Based on my reading of the above, “Vanguard Lifestrategy 80% Acc” and “Vanguard Lifestrategy 80% Inc” are identical for CGT purposes. They have different ISINs http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000MLUR
http://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000MLUQ
Based on reading the above HMRC webpage(s), I believe
* “Vanguard Lifestrategy 80%” and “Vanguard Lifestrategy 60% ” are different shares.
* two funds that tracked the same index eg Vanguard FTSE All share and say Fidelity All share WOULD count as different.
@Haphazard, it is pretty complicated, but a couple of pointers:
Annual allowance is £40,000 for most people, less for high earners and anyone who has taken flexible pension from a defined contribution scheme. But you can, if you meet the conditions, carry forward unused annual allowance from the last 3 tax years. You have to take into account both your own and any employer contributions for this.
However the maximum amount of contributions you can get tax relief on is equal to the greater of your gross salary or £3600 pa. You can theoretically pay in more and not get tax relief, but there is no point (and in practice you are not normally allowed to). Employer contributions don’t count. Carry forward doesn’t apply to this at all.
If you have a defined benefit pension the amount of your contributions, or the employers, are not relevant for the annual allowance calculation. The calculation is based on the value of the pension accrued in the tax year- the actual cost is not relevant.
Hmm, I’d argue perhaps this is a disadvantage of index investing (outside of an ISA). If you hold individual shares you can set some of the indices’ losers off against the winners in a particular year (buying back later) and generally make use of your allowance every year to try to keep a lid on your taxable liabilities. Whereas in an all-in fund you can’t finesse like this, and the annual allowance might go begging. (Notwithstanding other strategies being discussed here).
Readers might recall me facilitating something vaguely similar when I started buying back into energy stocks in late 2015: http://monevator.com/three-reasons-i-bought-a-mini-portfolio-of-oil-shares-instead-of-an-energy-etf/
Some of the US robo-advisers go to town with this sort of tax-loss harvesting; I seem to recall even reading that in a (presumed) future of totally free trading costs, it’ll be more tax efficient in the US to hold say 1,000 holdings of an index under an automated account as opposed to an index fund for this reason.
Not sure if that would be true also in the UK, with the 30-day rule and whatnot (though from memory the US has an equivalent) and it might require some other fancy footwork from the robo adviser to avoid ballooning tracking error etc. (Perhaps using derivatives or similar?)
Joint account with spouse allows doubling your CG allowance.
Plus double dividend allowance.
Plus interest allowance.
11k*2 + 5k *2 +(skip this)= 32k tax avoidance…
Hi,
Thanks for this and some great reading on this – I wasnt aware of the Sharing one, this is a great news (although it will mean we may have to get married!).
It just shows the important of utilising as much of your ISA allowance (and pension) as possible every year to avoid any of this fun and games.
Right – I am off to read up on your “how to avoid CGT” article now – although it will be a few years before I am in a position to have filled both our ISA allowances, my pension, over paid the mortgage etc. to worry about it 🙂
Cheers,
FiL
@Haphazard
The annual allowance is currently £40k (unless restricted by you being a very high earner or drawing certain pensions).
This £40k includes your (net) contribution, the 20% tax relief your scheme will reclaim and any employer contribution. (Some schemes you pay into gross and there’s no tax relief claimed by the scheme – same effect.)
You can utilise unused allowance going back 3 years, but in a strict order – you have to use your current year’s allowance first. Thus if your relevant earnings are less than £40k they will be fully covered by this year’s allowance. I think that’s what your advisor meant when he said you couldn’t utilise prior year’s allowances if you earned less than £40k.
My understanding – I think Nadan’s “identical” might be a typo – is that Inc and Acc funds are different for CGT purposes. Thus you can sell one and crystallise a gain/loss and immediately buy the other without falling foul of the 30 day rule.
Perhaps the easiest solution – if you can’t go the ISA/SIPP route – is to sell what you want and buy a tracker that roughly matches what you sold, then wait the 30 days. There’s so many trackers out there there’s bound to be one you want but don’t already hold.
Relevant UK earnings for pension contributions also includes benefits in kind, so if you have a company car (for example) you can in principle contribute that amount as well (bearing in mind tax relief, the annual limits and any carry forwards). Of course, you don’t have to make the contribution out of this year’s earnings – it’s just a number, so you can use your savings.
Bed and spousing, give and take, bed hopping – are these actual terms used in personal finance?
1) Total contributions (you, employer, tax relief) to a pension in one year can’t exceed your salary.
2) The first £40k comes out of this years allowance
3) If your salary is greater than £40k, you can use unused allowances from up to 3 years ago, oldest first
@A Different Richard
Just to clarify, I really meant that the Acc and Inc units of the same unit trust are identical for CGT purposes. They have identical portfolio. So, the transfer from one to another is treated as a “share reorganisation”; not a [disposal and buying]. So, if I sell a Inc and buy a Acc of the same unit,l trust, there is no disposal and so no capital gains / losses. See below.
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709
Purely out of interest… If you have a pile of cash available is it possible to do a sort of reverse bed and breakfast (breakfast in bed?): buy first (double your holding) *then* sell?
@Nandan et al — Interesting discussion. I’d like to get to the bottom of this some day, perhaps by speaking to HMRC. Personally I’d err on the side of caution, as others have implied. Over 30 days most similar but different funds are going to move very similarly — or at least where they don’t, the out/under performance will probably be random — so particularly if you’re a passive investor investing on a platform with no fund dealing fees you could just check out for a month into something pretty similar and then come back in 30+ days. Fees and whatnot won’t make much difference over that time. (Personally I’d probably check out and not come back, as you’re immediately starting to eat into your CGT reporting allowance for next year, even if you don’t exceed the gain, but then I’d probably be more relaxed than many about exactly which passive index fund I was in).
The big snag would be if moving from say a Vanguard tracker into an L&G tracker or whatnot was deemed as not crystalizing a CGT gain/loss, but as far as I know that’s not the case.
@Nandan – thank you – something to think about (and apologies for spelling your name incorrectly). I was of a different impression – that Acc and Inc were different, but – for example – Class R and Class I (Retail vs Institutional) were the same. Now I’m not so sure…
@Nick – yes, that would work to crystalise your CGT gains/losses but you still end up all in cash (so you may as well have just sold). The 30 day rule only applies to “sell then buy” not “buy then sell”. However if you do the latter and want to end up with the original amount of shares you’re only selling half your holding. I think shares are now pooled for CGT purposes so you’d only crystalise half your gain/loss. If you rebuy in 30 days then that crystalisation is treated as not having occurred. But I’m no expert…
I think the key takeaway is to bed and ISA/SIPP if possible, otherwise buy something “obviously” different if you wish to buy within 30 days of selling something for CGT purposes.
I’ve fired the query re Inc vs Acc being the same for CGT purposes to HL. I presume they’re not allowed to give tax advice off the cuff, but I’m hoping they’ve been asked the question so often that they’ve got the official answer from HMRC at some point.
I’ll let you know what they say…
If a switch to another provider tracking the same index (e.g. Fidelity to L&G) is CGT crystallising, then this strikes me as the optimal strategy. On many platforms there would not even be a switching fee. Do this then Bob’s your uncle. A serious plus point for tracker OEICs (but not ETFs, due to fees).
Well, HL came back early this morning. The timing and text is such that I’m guessing it’s standard for this query, rather than the advisor creating it himself.
“If you switch between different classes of the same fund, i.e. from income to accumulation, then HMRC classes this transfer as a ‘share reorganisation’.
For capital gains purposes a share reorganisation is not treated as a disposal of the taxpayer’s existing shares or an acquisition of any new shares and new shares issued are treated as though they were acquired at the same time as the existing shares.”
I had thought that different ISIN/SEDOL = different units for CGT purposes, but clearly not…
Just to say if you are taking both sides of a trade of the same security and it is in size, then it is usually worth setting this up so you control everything. This is how it works (and it is much easier if the two accounts are with the same broker)
– You call your broker.
– You determine the price at which to sell the security (within bid/offer spread) in account 1.
– You buy back the exact quantity of the security at a price which makes the spread for the whole trade £30 – £50 in account 2.
– You instruct your broker to find a market maker to accept the paired trade.
– Broker collects 2 x Telephone Trade Fee.
– Market maker collects £30 – £50.
This is essential for anything in size that is illiquid and/or has a large spread, it saves a lot of money.
Some brokers will do the trades without going via market makers, but if you should ensure the trades go via a market maker. The reason for this is that strictly speaking you sold to the market maker and bought back from the market maker so if there is ever any question over the pricing of the trade HMRC can not do anything. If the paired trade is a private sale you lose that protection, HMRC may determine that it was not at fair value.
@nandan and others – thank you. I play safe though by moving to an obviously different index.
@investor this is not a comment about the general pros and cons of passive / active investing but I think you have either misunderstood what I meant or are mathematically wrong in your comments about CGT allowance harvesting (where you highlight in italics my point). The point about the index is that the volatility of gains of different shares automatically ‘cancels’ so no need for frequent tax loss harvesting. Consider an active investor with 4 shares. One of them quadruples in price giving a substantial gain. The others fall a bit so the investor has to do all the trades to harvest the losses on the three shares that have fallen. The passive investor who owns the same 4 shares in an index fund has less to do as the capital gain of the share that quadrupled is automatically offset by the fall of the rest of the (4 share) index.
@Adrian — Yes, you’re right. I think I was conflating various other active issues in my thinking. Or perhaps I’m just scarred from years of having to manage down an unwrapped chunk of my portfolio (and wishing I hadn’t run out of losers for offsetting!) which is giving me a behavioural blind spot. 😉
Does the 30-day share matching rule apply to rebates and dividends, as well as new purchases?
I have a fund from which some shares are automatically sold each month to pay the fund’s fees, then a week or two later (within 30 days), I get a rebate of some of those shares back into the fund. Does a portion of the shares sold need to be matched against the shares rebated later?
Similarly, if I sell a portion of an Inc type fund, then get a dividend paid as new shares into that fund within 30 days, do I have to match some of the shares I sold with those received in the dividend?
Hello all. I realise i’m a bit late on this topic. To be clear with reference to the 30 day rule, what is/is not allowed in the following examples:
1: sell iShares Core FTSE 100 ETF (Dist) then next day buy Vanguard FTSE 100 (Dist)
2: sell iShares Core FTSE 100 EFT (Dist) then next day buy iShares Core FTSE ETF (Acc)
3: sell iShares Core FTSE 100 EFT (Dist) then next day buy SPDR FTSE UK All Share ETF (Acc)
Hey!
Very interesting topic.
Just to double check my understanding, if I am selling in my normal account a position with a big loss and that I am buying back that same position in my isa account. I will be able to use the loss to offset some future gain in my normal account, and will not pay tax if my new position in my isa account is recovering?
Thanks
@Duranton — We can’t give individual tax advice in any way.
However it’s true that capital losses generated in normal / un-sheltered accounts can be used to offset similarly unsheltered capital gains in future years, and that no tax is liable on either capital gains or dividends if the assets are held within an ISA or a SIPP.
Note that capital gains/losses in un-sheltered accounts may need to be reported to HMRC via your tax return — and you can only use a loss as an offset in the future if you previously declared it in the year you take it. Also you need to report all your activity if chargeable assets traded exceed 4x the CGT limit, so keep that in mind, too.
Hope this helps! 🙂
What about selling shares and buying call options and holding them for 30 days? If they’re deep in the money and long dated they’ll move like the stock (no distributions of course) and at lower cost too (roughly half the capital needed to set this up). I guess the difficulty is that not all shares have a liquid options market, but perhaps a CFDs or other derivatives would work too