Tax & Investing: Remember your 'Bed and Breakfast' loophole
With the end of the tax year coming up, if you have any of your capital gains allowance left it may be wise to consider using it up. Below I will explain a way in which this can be done efficiently, without having to suffer from the thirty day 'Bed and Breakfast' rules. To do this you need to have an ISA, and for this example I am going to assume you have used none of it, and therefore have access to the full £10,100. If a person has - let’s say - £6,000 of their £10,100 capital gains allowance left, and they hold a stock, lets say ABC Corp, where they purchased 10,100 shares at a price of 50p that now is worth 100p a share, giving it a current market value of £10,100 - meaning that they have a £5,000 gain.
What a person could do to use up both their capital gains allowance and their ISA allowance is to sell their entire holding of ABC corp on the last day of trading and at the same time purchase that stock back in their ISA (Just to note, this trade does not have to be done on the last day of trading, in reality it can be done anytime a person wishes within the tax year).
This would result in that person having used up £5,000 of their remaining £6,000 capital gains tax allowance, and their full ISA allowance. Just to note, this can still be done if you have no ISA allowance left, but it is a more risky way of doing it, as it means being out of the stock for a day. As what you do is sell the stock on the last day of trading in the tax year, then buy it back in your ISA on the first day of the new tax year. Also if you have a spouse with an ISA allowance left, you can use their account i.e. sell the stock in your account, then buy it back in your spouse’s ISA, therefore crystallising the gains, and using up your remaining ISA allowance.
With any idea, there is of course weaknesses, with the biggest in this case being due to the fact that it normally takes three trading days for you to be able to withdraw the money from your account after the sale of a stock, then likely another three trading days before it enters your bank account. You will have to have £10,100 in cash spare to do the trade (If you intend to use the full ISA allowance), or more if you have a spouse.
Jus to finish, the concept given here can also be used to crystallise losses, i.e. sell stocks that you wish to keep, but that are at current showing a loss, then buy them straight back in your ISA. Therefore realising the loss and getting the tax benefit from the loss, yet also at the same time not missing out on any movements in the share price.
If anyone has any other tax ideas please feel free to post them below, also if you think you can add to what I have written, or if you feel there are errors in anything I have written, again please feel free to post this below.
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26 Comments on this Article show/hide all
Haider
I'm 99% sure that any both husband and wife are caught by the 30 day rule here.
In your scenario, if I understand it correctly, the wife will effectively have been a holder of the stock as if she had held them in her own name all the time. That they were transferred to her a day ago or ten years ago, makes no difference. Buying the stock back by her and husband within the 30 day rule will trigger the trap.
The only exception to this is if the husband or wife buys the shares back in an ISA or SIPP.
As I say, I'm 99% sure that's the case under yóur scenario, of course, that presumes I know what I'm talking about, especially at 3.45am.
D ;-)
<deleted as I misunderstood the situation>
Darron and doverbeach
Thanks. Just to clarify, the husband originally held ALL the shares.
1. He makes £10,100 of profit and still has lots of shares left over
2. Just before the tax year-end, he gives/transfers shares to his wife (at par). She then sells in order to realise further capital gains (in her own account).
Are both people now unable to buy back within 30 days?
D'oh. Thanks db. You are, as ever, right.
As I said, never rely on what I say that early in the morning. I thought Haider meant husband sells, transfers £10k odd (of stock) to wife... Ho hum....
Nope, not the kids...well, sort of. I was up doing some work on a project then got stuck into making a dumper truck cake for my youngest's 4th birthday today.
actually you were right ! Haider has just clarified things!
db
Ah, as I thought then. No, neither party can buy back unless in ISA etc.
In reply to haiderali, post #9
Haider,
yes both are caught. The fact that the shares were transferred to her is irrelevant (except to establish the purchase price) - once she sells she can't buy back in 30 days and establish the desired capital gain.
db
In reply to doverbeach, post #13
I'm guessing that HA may have an SIA problem.... ;-)
Protecting capital gains is a damned good idea - but if a bid arrives within the 30 days then that could rather negate the advantage.
Don't forget the possible "bed and ISA" alternative, if you still have capacity.
ee
In reply to haiderali, post #6
I'm not sure if this will help, if you wish to sell a stock to lock in the gain and buy it back, I believe it is possible if your husband sells it, for you to buy it back, as long as that stock has never been in your name, as that way the husband will use up his captial gains allowance, yet not miss out on any possible movements in the stock by being out of it for thirty days. And you can do this each year on stocks, therefore always using up both your cgt allowance. Though do not quote me of this, as I am not sure if you can definitely do this, its just I remember reading about this somewhere a long while ago.
In reply to hannibal, post #5
For example Heritage Oil's recent large special dividend. As such special dividends are often returns of capital, do you know if they are excempt from tax or if they are taxed at the normal rate?
To my knowledge, any dividend, special or not is taxed the same, as an actual return of capital is a different process. So if it says its a dividend then you will have to pay the dividend tax on it (i.e. income).
Also I am assuming that a tax return need only be completed if my realised capital gains are above the £10,000 allowance.
Indeed you are correct, you only need to file if you have something to pay, but if you make a loss in a tax year it may be wise to file in a tax form, as you will be able to carry those losses forward into a future tax year. I believe you have five years to do this, so if you have made a cash loss in any of the last five years, you will be able to file a return and carry the losses forward. Hope this helps.
In reply to Gray Woods, post #16
"you only need to file if you have something to pay" - not entirely correct. From HMRC Tax Return Guide 2010 TRG5 - "You must fill in the Capital Gains Summary pages and attach your computations if in the tax year: you disposed of chargeable assets which were worth more than £40,400,..............
Hope this helps.
In reply to haiderali, post #9
Spreadbetting is not an area I'm particularly knowledgable about, but assuming you are comfortable with the practicalities of the process and can do so with tolerable transaction costs a possible solution might be:
1. transfer shares to wife as gift (required to avoid stamp duty)
2. wife sells and crystallises gains (& importantly retains the proceeds as it is meant to be a gift)
3. wife takes out spread bet, going long, for same nominal amount as the sale proceeds
4. after 31 days, wife closes the spread bet and repurchases the shares to avoid ongoing funding costs
Any problems I've missed?
In reply to disneymatter, post #17
Indeed you are correct, that was a lack of foresight on my part as I should have mentioned that .
I just spoke to someone at Barclays and asked whether the 30 days were up on the stock (EO.) that my wife sold on the 5th April 2011, i.e. could she now buy back (seemed a shame not to at this afternoon's price).
He said that the 30 day rule no longer applied
Is that the case?
In reply to haiderali, post #20
Far as Im aware it is still there lurking and Barclays are being their usually useless selves again.
D - not feeling very charitable today.
Hi Darron, thanks.
First time I have been in this position, but looking at the calendar today was exactly 30 days from 5th April, so would dealing have been allowed today or would tomorrow be the first day?
In reply to haiderali, post #20
Nice to see that the the tax rules have benefitted someone. One would have struggled to forecast the last few days if one had been trying to do so at the start of April......or even on Tuesday morning!
Hi ee
I noted what you said above in relation to SIA. Those were all bed and ISA'd many years ago!
I really struggled to sell the EO. on the basis that the tax tail should not wag the investment dog and the sale price seemed poor at the time (not now), but it had become a huge position and the tax year seemed a good excuse.
Yes I'd guessed as much. I always say that it is better to be lucky than smart and the random influence of the tax year end is a good example. I remember someone with a similar tale a couple of years ago, where he'd sold everything up in 2008 in order to move house or country (I forget which).....and then came back a few months later and got so much more for his money.
Long may such luck continue (and can I have some please? ;-))
I believe that the wait period should be 31 days before buying again to avoid the matching of the sell to the purchase which renders the crystallisation for CGT purposes as null - like Darron, I don't know why Barclays (Stockbrokers I guess?) would be suggesting that the rule is no longer there.
Regards