NEWS & VIEWS
The information provided in this article is not tax or financial advice. If you are unsure of the treatment of a transaction, we encourage you to seek the appropriate advice.
Bed and Breakfast Share Dealing
Prior to reform to UK capital gains tax rules, it was common for people to sell shares and buy them back in a very short space of time to take advantage of their annual exemption amount, reset the base cost of their units, and reduce their future taxable gains. The practice was known as ‘bed and breakfast’ share dealing. HMRC put an end to this by introducing new share matching rules for disposals in 1998.
The rules stated that same day purchases would be disposed of first, followed by any holdings purchased in the 30 days following the disposal. It was then a ‘last in, first out’ principle for shares acquired after 5 April 1998.
For shares acquired before 5 April 1998, things were more complicated.
Holdings were split into three groups: shares acquired between 6 April 1982 and 5 April 1998; shares acquired between 6 April 1965 and 5 April 1982; and shares acquired before 5 April 1965. Gains or losses on these disposals were calculated by taking the average price of shares in each group.
Share Matching Rules
Steps were taken to simplify this in 2008, alongside other reforms to capital gains tax.
As of 6 April 2008, all shares of the same class in the company, acquired from 1 April 1982, are pooled together in what was referred to as a ‘section 104’ holding. Each share in this holding is treated as if acquired at the same cost.
Shares will not enter the ‘section 104’ pool if they are identified under the ‘same day’ or ‘30-day’ rules.
The cost of shares bought on the same day as shares sold, or shares bought within 30 days after a sale, is used to calculate the gain or loss. The gain or loss built up over the holding’s total owned lifetime will not be crystallised until the shares are disposed of further down the line.
Shares sold are matched with shares acquired in the following order:
- Shares acquired on the same day as the disposal, known as the ‘30-day rule’
- Shares acquired within 30 days of the disposal, known as the ‘30-day rule’
- All other shares with their costs added together, sometimes called a ‘Section 104 holding’
Understanding this rule is crucial when navigating capital gains tax as it can shape strategies for both gains and losses.
Strategies That May Avoid Share Matching Rules
There are many ways an investor can legitimately sell shares but remain invested in the same fund, without the transactions being considered bed and breakfast share dealing. These include strategies known as ‘bed and ISA’, ‘bed and SIPP’ and ‘bed and spouse’.
Let’s look at how they work:
Bed and ISA:
Shares held in a general investment account can be sold and then required within a Stocks & Shares ISA, without triggering the 30-day or same day rule. This is because shares held within an ISA are free from income and capital gains tax.
The annual ISA subscription limit is £20,000 per person across all their subscriptions, however. As a result, an investor would have to consider their available ISA allowance before acquiring shares in this way.
Bed and SIPP:
Like the Bed and ISA strategy, investors can sell shares and buy them back in a Self-Invested Personal Pension (SIPP) without triggering share matching rules.
This is because, like with a Stocks & Shares ISA, investments held within a SIPP are free from capital gains tax and income tax. Investors can also benefit from tax relief when they make a pension contribution, up to an annual contribution limit of £60,000.
Bed and Spouse:
In the UK, transactions between spouses (or civil partners) result in neither a gain nor a loss. This means the receiving spouse will acquire an asset at the original acquisition price, not the market value or price paid at the time of transfer.
As a result, some investors may choose to transfer an asset to their spouse in order to take full advantage of the other’s annual exemption amount.
Alternatively, many investors choose to take advantage of this under the Bed and Spouse strategy. Here, one spouse sells an asset and the other immediately buys it back, meaning the couple overall retains ownership of the asset.
In this scenario, however, the first spouse must not be given the asset back. HMRC will view this as a series of transactions intended to avoid tax.
How FSL Can Help Investors and Advisers
Our award-winning capital gains tax software, CGiX, helps ensure advisers and their clients can employ the most tax-efficient strategies possible, without being caught out by the 30-day rule.
To help with tax planning, CGiX has a 30-day column on its capital gains tax reports to clearly indicate to advisers and their investors whether assets they are looking to repurchase fall within the 30-day period under share matching rules. This allows them to fully consider the consequences on their overall gains or losses if certain transactions were to take place.
CGiX users that opt to use our What If functionality will also be able to see the capital gains tax impact of a repurchase before executing the transaction.