Cap Gains Tax Loophole ?

Intelligent_Investor

Is the following technique a valid way of paying less capital gains tax on stocks and shares (or any liquid assets) ?

"Every year, as soon as you make the capital gains allowance (£11k) sell your portfolio and buy it back immediately."

This allows you to roll over the allowance every year. As an example imagine you invest £100k and in 10 years that becomes £200k at a rate of £10k/year. If you sell after 10 years you will have to pay cap gains tax on 100 - [allowance - c£10k] = £90k right ? But if every year you sold your position and used the £10k cap gains allowance then in the tenth year you would sell at £200k market value, you would have paid £190k and thus would have no capital gains tax.

Can someone verify whether the above is correct or show me where I am going wrong.

zygurat789

Intelligent_Investor wrote: »

Is the following technique a valid way of paying less capital gains tax on stocks and shares (or any liquid assets) ?

"Every year, as soon as you make the capital gains allowance (£11k) sell your portfolio and buy it back immediately."

This allows you to roll over the allowance every year. As an example imagine you invest £100k and in 10 years that becomes £200k at a rate of £10k/year. If you sell after 10 years you will have to pay cap gains tax on 100 - [allowance - c£10k] = £90k right ? But if every year you sold your position and used the £10k cap gains allowance then in the tenth year you would sell at £200k market value, you would have paid £190k and thus would have no capital gains tax.

Can someone verify whether the above is correct or show me where I am going wrong.

I hate to be the one to dissolution you but HMRC have been around for a long time and they have been plugging loopholes like yours for nearly as long.
The law is that if you bed and breakfast shares as you suggest the transaction is null & void for tax purposes. You have to wait at least 30 days before you repurchase for your scheme to be effective. There is, however, a bed [STRIKE]your[/STRIKE] and spouse where you sell and your spouse buys on the same day, that works. Are you married?

Intelligent_Investor

Thought it wouldn't be that simple....

So just to clarify, if I sell my portfolio and reinvest within 30 days it will be like I did nothing from a tax perspective ? That is, my book value from which capital gains are calculated will remain the same. But if I wait 30 days and the reinvest, the new book value will be what I paid the second time and all cap gains will be calculated from there onwards ?

Still doesn't seem bad, you only miss out on 30 days of market activity.

Not married, but if I was its perfectly legal for me to sell my holding and have my wife buy them back the next second to effectively roll over the cap gains allowance year on year ?

getmore4less

Only applies to the same share so you can keep your money invested if you buy something else.

While building up a portfollio this may be viable as you reqlise gains and rotate cash into the next share, topping up the sold ones later.

As it is likely the gains will make that share top heavy if looking for a ballanced portfolio selling a few will ne in the plan anyway

Commission and stamp duty eat into your gains.

bowlhead99

Intelligent_Investor wrote: »

So just to clarify, if I sell my portfolio and reinvest within 30 days it will be like I did nothing from a tax perspective ? That is, my book value from which capital gains are calculated will remain the same.

Not quite. The sale is not ignored.
The shares you sold are matched, for CGT purposes, with the ones you re-bought within 30 days. So if you sell 10000 shares at £1 each and then use the proceeds to buy back 9,901 shares at £1.01 each a few days later, you have actually made a small £99.01 loss on those 9,901 shares that you sold (but might have made a small gain on the other 99 shares you sold and did not re-buy).

Alternatively you might have spent the £10k proceeds a few weeks later to buy 10,101 shares at 99p each, then your 10,000 shares sold are matched with 10,000 of the shares you 'bought back', making a penny gain on each of those 10,000 shares for a £100 gain total.


But yes if you sell all your holding of a particular company or fund and wait more than 30 days before buying back - the shares that you sold can't be matched with the new ones you bought, their price will just be compared with the average price you paid for them, giving a gain or loss. Then the new shares you buy, will have their own purchase cost to compare with what you get when you sell them, further down the line.

Not married, but if I was its perfectly legal for me to sell my holding and have my wife buy them back the next second to effectively roll over the cap gains allowance year on year ?

The rule is there to stop you bed-and-breakfasting the same shares in your own name (terminology comes from buying one night and buying back the next morning).

But there's nothing to stop you bed-and-ISA or bed-and-pension or bed-and-wifebuythem.

If you buy them in a tax-protected wrapper or someone who is not you buys them, then the new shares bought can't be 'matched' with the old ones sold, so the sale of the old shares will crystallise a real gain or loss of the amount you expect.

As getmore4less suggests, you can simply buy something else. So if you sell the HSBC FTSE all-share tracker, you can spend the proceeds on a Vanguard all-share tracker or a Blackrock all-share tracker or an L&G all-share tracker, and then you've achieved your objective of still being in basically the same investment but the shares can't be matched in any way for CGT purposes, because they're different shares.

p00hsticks

Of course, a simpler option is as far as possible to use a S&S ISA.....

JasonPr

bowlhead99 wrote: »

So if you sell the HSBC FTSE all-share tracker, you can spend the proceeds on a Vanguard all-share tracker or a Blackrock all-share tracker or an L&G all-share tracker, and then you've achieved your objective of still being in basically the same investment but the shares can't be matched in any way for CGT purposes, because they're different shares.

Is there any case law that shows that HMRC would not consider this buying the same share?

I believe the HMRC notes speak of "same class of shares" or similar terminology, so I'm not sure if selling a HSBC FTSE and buying a Vanguard FTSE would get around the 30 day limitation.

Cook_County

Of course you could make losses all the way along...

bowlhead99

JasonPr wrote: »

Is there any case law that shows that HMRC would not consider this buying the same share?

I believe the HMRC notes speak of "same class of shares" or similar terminology, so I'm not sure if selling a HSBC FTSE and buying a Vanguard FTSE would get around the 30 day limitation.

The rule to prevent bed-and-breakfasting relates to buying the same class of share in the same company or investment vehicle and basically being left with the exact same investment having been out of it for less than 30 days.

If I own a share or a unit in an HSBC open ended investment company or unit trust, and I sell it, and then I go and buy a share or a unit in a Vanguard or Blackrock investment company or unit trust, the purchase price of the Vanguard shares cannot possibly be matched with the sale price of the HSBC shares - they are entirely different companies, operated by entirely different people.

The fact that the two companies have a similar strategy (to invest in large UK businesses in an attempt to mirror the performance of the FTSE100 index) does not mean you have bought the same 'class' of shares in the same company. You have not even bought the same company. I presume there is no relevant case law because HMRC will not have been stupid enough to challenge a tax computation on the grounds of wanting to somehow match sales of one company with subsequent purchases of an entirely different company.