Capital gains tax 30 day rule / bed and breakfast
Every year, UK- based investors benefit from a capital gains tax (‘CGT’) allowance. This allowance means that up to a certain value (£12,300 in the 2020/21 tax year), UK individuals do not pay any capital gains tax on any profit they make on disposal of assets. If unused, the capital gains tax allowance cannot be carried forward to the following tax year.
This ‘use it or lose it’ style rule meant that investors holding assets such as individual shares or holdings in funds would sell their assets prior to the end of the tax year before quickly repurchasing them in the new tax year. This was known as a ‘bed and breakfast’ share deal. By following this approach, investors could utilise their CGT allowance and reset the base value of their assets. This meant that in the following tax year, the acquisition cost for CGT purposes would be the latest acquisition cost.
This was an acceptable approach until March 1998, when the rules changed and the capital gains tax 30 day rule was introduced.
WHAT IS THE CAPITAL GAINS TAX 30 DAY RULE?
The capital gains tax 30 day rule simply states that UK investors cannot use the bed and breakfast share dealing approach outlined above. Instead, investors must wait 30 days before acquiring the exact same share or same class of a specific fund.
By introducing this rule, HMRC was attempting to stop investors who intend to maintain ownership of specific securities from maximising their CGT savings.
If the same individual shares (or shares/units in the same class of a fund) are acquired within 30 days, then the share matching rules apply. These rules state that any shares newly acquired within 30 days of the disposal are matched with disposed shares in the following order:
Any shares acquired on the same day as disposal (the ‘same day rule’)
Any shares acquired within 30 days following disposal (the ‘bed and breakfast rules’)
Any other shares on an average cost basis (sometimes referred to as the ‘Section 104 holding’)
The effect of these rules is that when the same shares are ultimately sold, the original acquisition cost rather than the repurchase cost will be used to calculate the capital gain.
BED AND BREAKFAST 30 DAY RULE CALCULATION
Nigel acquired 10,000 shares in ABC Fund seven years ago. The cost per share was £1, but the shares have now risen in value to be worth £2.23 each, meaning the value of the entire holding has increased to £22,300. The capital gains tax allowance is £12,300 in the 2020/21 tax year. Nigel is keen to use this allowance to avoid paying CGT if the value of the shares in the fund continue to rise in price.
Market value of shares £22,300
Acquisition cost £(10,000)
Capital gain £12,300
If Nigel decides not to repurchase the shares, the CGT allowance will cover his capital gain and no tax will become payable.
EXAMPLE 1 – SHARE REPURCHASE AT A PREMIUM WITHIN 30 DAYS
Two weeks later, the share price for the fund has risen to £2.40. Nigel now has to spend £24,000 to acquire the same 10,000 shares. The capital gain on the original disposal now needs to be recalculated, comparing the disposal proceeds with the cost of reacquiring the shares.
Disposal proceeds £22,300
Cost of reacquiring shares £(24,000)
Capital loss £(1,700)
A £1,700 loss has been created and if Nigel decides to sell his 10,000 shares at a later date, the original acquisition cost of £10,000 will be used as his base cost in the CGT calculation.
EXAMPLE 2 – SHARE REPURCHASE AT A DISCOUNT WITHIN 30 DAYS
Two weeks later, the share price for the fund has fallen to £2.00. Nigel now has to spend £20,000 to acquire the same 10,000 shares. The capital gain on the original disposal again needs to be recalculated.
Disposal proceeds £22,300
Cost of reacquiring shares £(20,000)
Capital gain £2,300
A £2,300 gain has been created and if Nigel decides to sell his 10,000 shares at a later date, the original acquisition cost of £10,000 will be used as his base cost in the CGT calculation.
EXAMPLE 3 – SHARES REPURCHASED AND SHARE HOLDING INCREASED WITHIN 30 DAYS
Two weeks later, the share price falls to £2.00 and Nigel decides that now is a good time to increase his shareholding. He purchases 20,000 units (10,000 more than originally held) at £2.00 each, costing £40,000.
In this scenario, £20,000 of the acquisition would be matched to the previous disposal, identical to scenario 2. This would give rise to the same gain of £2,300.
Going forward, the base cost for the shares would be calculated in accordance with section 104 rules (i.e. the blended average cost of shares) using:
10,000 shares at £1.00 each (the original acquisition) = £10,000
10,000 shares at £2.00 each (the new acquisition) = £20,000
This would give rise to a base cost for CGT purposes of £1.50 per share (£30,000 / 20,000 shares).
WHAT ARE MY OPTIONS IF I CAN NO LONGER BED AND BREAKFAST SHARES?
There are multiple legitimate strategies for avoiding the ‘bed and breakfast’ rules including bed and ISA, bed and SIPP, bed and spouse, utilising CFDs or buying similar assets.
BED AND ISA
There are currently no rules against disposing of the investments you hold in your general investment account and acquiring the same investments within a tax-free Stocks and Shares ISA. Many investors adopt this ‘Bed and ISA’ approach at the end of the tax year, disposing of their current investments and reinvesting in the new tax year once their ISA allowance has been renewed. The sale and repurchase could be done on the same day, or in the next financial year, depending on preference and/or the level of your current year ISA allowance remaining.
BED AND SIPP
The rules also currently allow you to ‘Bed and SIPP’ which means you can sell your investment holdings to utilise your annual capital gains tax allowance, before rebuying the same investment in a SIPP. This can either be done manually or automatically if you invest via certain brokers such as Hargreaves Lansdown. Taking this approach avoids your capital being out of the market, as it can be done on the same day. Further, depending on your personal circumstances, you may benefit from income tax savings of 20%, 40% or 45% depending on whether you are a basic, higher or additional rate taxpayer, and what other pension investments you have made in the year.
BED AND SPOUSE
A share transfer between spouses is not currently considered a disposal for creating a taxable capital gain. This means that you can sell your shares and gift the disposal proceeds to your spouse, enabling them to make the repurchase. Again, the sale and repurchase can be done on the same day – there is no need to wait 30 days before repurchasing.
BUYING A SIMILAR ASSET
If you are disposing of an investment in a fund, you will not be able to repurchase the same class of share within that fund within 30 days. However, there is nothing preventing you from either acquiring shares/units in a fund with similar underlying holdings or acquiring shares/units of a different class within the same investment fund.
MIMIC BED AND BREAKFAST STRATEGY USING CFDS OR SPREAD BETTING
The final and most complicated option is to mimic the bed and breakfast strategy using leveraged products (CFDs or spread betting). This option will not be suitable for the majority of private investors, but is another way of remaining exposed to a particular underlying share or index whilst avoiding the bed and breakfasting rules.