To prevent the use of “bed and breakfast” (B&B) trades as a tactic for reducing tax on gains made from the sale of shares, HMRC employs anti-avoidance rules. However, there’s a legitimate way around them. How does it work?
Bed and breakfasting shares
At one time you could reduce your long-term capital gains simply by selling and repurchasing the same shares. This process was known as bed and breakfasting (B&B), because it usually involved selling shares one day and buying them again the next. The following example illustrates how B&B could work had it not been outlawed.
Example. In 2010 Imran bought 5,000 shares in Acom Plc for £30,000. On 10 April 2020 he sold them for £40,000 making a gain of £10,000. There’s no capital gains tax (CGT) because the gain was less than the annual CGT exemption (£12,300 for 2020/21). The next day Imran buys the same number and type of shares for £40,000 in total. In December 2021 Imran sells them for £48,000. Without the B&B rules Imran’s gain would be £8,000, i.e. £48,000 less the amount he paid for them in April 2020 £40,000, not the £30,000 he originally paid. The interim sale has reduced the gain by £10,000 for no tax cost. However, the B&B rules prevent this.
B&B rule
The B&B rule says that if you buy shares of the same type within 30 days of selling them, the cost to be taken into account when working out the gain for a subsequent sale is the original and not the repurchase price. In our example, this would mean that Imran’s gain for the December 2021 sale is £18,000 (£48,000 – £30,000). After knocking off the annual CGT exemption, £5,300 of the gain would be taxable at up to 20%. Tip. You can dodge the B&B rules by leaving more than 30 days between the sale and repurchase of the shares. However, if in the meantime the share price goes up, the increased cost of buying them back reduces the saving from the sale and repurchase arrangement. Tip. If you’re married or have a civil partner you can work around the B&B rules. One spouse or civil partner can sell the shares and the other purchase them the following day, or even the same day. After 31 or more days they can give the shares to the first spouse. HMRC won’t attack this arrangement providing you have the paperwork in order (see The next step ).
A no-tax transfer
A gift of shares (or other assets) from one person to another is usually treated for tax purposes as if it were a sale at full market value. However, transfers of assets from one spouse/civil partner to the other counts as a sale at a price equal to the cost of the asset, meaning there’s neither a capital gain nor a loss.
Example. Imran owns 5,000 shares in Bcom plc, which he bought for £15,000 in 2013. He sold them on 31 March 2021 for £25,000, making a gain of £10,000. Imran made no other sales or transfers in the tax year. As the gain is less than the annual exemption there’s no CGT. Also on 31 March, Imran’s wife buys 5,000 Bcom plc shares for £25,000. After 31 days she gives them to Imran, which, because of the special rule for couples, counts as a sale at cost price, i.e. £25,000, so there’s no taxable gain or loss for Imran’s wife. The cost of the shares for Imran for CGT purposes is £25,000 and not the original £15,000.
If one spouse/civil partner sells shares, the other can purchase a similar holding at or around the same time. After 31 or more days they make a gift of the shares to the spouse that made the sale. The effect is the same as a B&B trade – the long-term gain for the first spouse is reduced but the anti-avoidance rules don’t apply.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.