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Tax Insider Tip: A Cunning Plan To Keep Using The Banned ‘Bed And Breakfasting’ Trick

16th May 2014
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Now for a more sophisticated type of capital gains tax planning. This was sometimes known as bed and breakfasting and used in particular to be done with shares that are traded on the stock market, as a way to take advantage of the annual exemption for capital gains tax without actually parting with the shares.

Just before the end of the tax year this involved going through your share portfolio and finding out what shares stood at a gain. Then you would make sure that you sold enough of those shares to produce gains that added up to your capital gains tax exemption (i.e. £10,900 for the 2013/14 tax year).

You then bought the same shares back again the following day, which of course is easy to do with shares listed on the Stock Market – hence the name, “bed and breakfasting”.

By doing this, you were able to increase the “cost” of your shares for CGT purposes by £10,900, and thus save more tax when you eventually sold them for real.
You could also do this if you had potential losses on some of the other shares because you could ‘bed and breakfast’ these as well, so that you realized the losses, but still owned the shares.

You could then set those losses against other capital gains in the tax year.

Tax legislation back in 1998 tried to outlaw bed and breakfasting. It said that if you sell shares and then buy them back again within thirty days you are treated as if the shares you sold are the same ones you bought back. This means that you don’t make the capital gain or loss you wanted to on them.
So to achieve the desired tax effect, you now have to wait thirty days before you buy the shares back – more like a summer holiday than a night’s bed and breakfast - but of course with the Stock Market that exposes you to the risk that the shares will go up in value during the thirty days that you don’t own them.
In the case of a husband and wife (or civil partners), bear in mind that if you’ve taken my earlier advice you’ve equalized your income so that you’ve both got a portfolio of listed shares.  What you do is make sure that you pick different shares for each spouse and so the husband sells the shares in company A and the wife sells the shares in company B.

The next day the husband buys back the shares in company B and the wife buys back the shares in company A so between the two of them they have still got the same share portfolio and they have successfully ‘bed and breakfasted’ their portfolios in order to use up their annual capital gains tax exemptions.

There was further legislation in 2008 which outlawed this practice where losses were involved, but it still works where you simply want to use up your annual exempt amounts on gains.

 

This is a sample tip taken from our 136 page guide:
101 Ultimate Tax Strategies Revealed.

Click here to receive a free copy of this tax saving guide today!

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