The History and Benefits of Bed and Breakfasting
For many years UK investors used a method called Bed and Breakfasting to increase the base cost of their assets. This used their annual exemptions and minimised CGT on an eventual sale. It used to be possible to do this across a single night hence the name.
The Impact of HMRC’s 30-Day Rule on Bed and Breakfasting Strategies
However HM Revenue & Customs (HMRC) introduced the 30-day rule in 1998. This rule prevents investors from buying back the same shares within 30 days of the sale. If you repurchase the shares within this window, the gain or loss is calculated based on the cost of the repurchased shares rather than the original purchase price largely rendering the planning useless.
This does not mean however that the plan cannot still be used.
Options include:
1. Sell and Wait 30 Days:
The simplest method is to sell your asset and wait 30 days before repurchasing it. This approach allows you to reset the base cost to the selling price, thus reducing the taxable gain when you eventually sell the asset. The downside is that you’re out of the market for 30 days, which could be risky if prices move significantly.
2. Bed and Spousing:
This is a variation where you sell the asset and your spouse or civil partner repurchases it on the same day. This approach works well for couples as it allows them to maintain their market exposure without triggering the 30-day rule.
3. Bed and ISA:
You can sell shares and repurchase them within an Individual Savings Account (ISA). This way, future gains and income within the ISA are sheltered from tax. The sale of the shares crystallises the current gain, and repurchasing them within the ISA ensures that the base cost is reset.
4. Bed and SIPP:
Similar to Bed and ISA, you can sell shares and repurchase them within a Self-Invested Personal Pension (SIPP). The advantage here is that gains within the SIPP are free from CGT, and you benefit from tax relief on contributions.
Timing Considerations
If you anticipate a rise in CGT rates, timing is crucial. You may want to crystallise gains and rebase your assets before the tax increase comes into effect. This will ensure that you pay tax at the current, lower rates and benefit from a higher base cost in the future.
Potential Risks and Considerations
While bed and breakfasting can be an effective strategy to manage CGT liabilities, it’s important to be aware of potential risks:
– Market Risk:
Selling and waiting 30 days exposes you to the risk of market fluctuations. If the asset’s price increases during the waiting period, you may miss out on gains.
– Transaction Costs:
Frequent buying and selling can incur transaction costs, which may outweigh the tax benefits.
– Legislative Changes:
Tax laws can change, and future legislation could close down some of these strategies or make them less effective.
Conclusion
Bed and breakfasting remains a useful strategy for rebasing the cost of your assets ahead of a potential Capital Gains Tax rise in the UK. While the 30-day rule has added complexity, with careful planning, it’s still possible to reduce your future tax liability. Always consider seeking professional advice to tailor the approach to your specific circumstances and ensure compliance with current tax laws.
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