Breakfast and bedding?

AaronAGString

I am lucky enough to hold shares that have made a significant gain over the last few years, and I would like to crystallise gains to the value of my CGT allowance, but still hold on to the shares, and not be exposed to the risk of the shares changing value over a 30 day period.

I am aware that there is an anti-personnel device in the tax law in the form of the bed-and-breakfast rule, which means it's no help selling shares then buying them back within 30 days. I have seen various workarounds discussed (bed-and-spouse, bed-and-ISA etc), but would it work instead to do it the other way around and buy new shares first then sell the old shares on the next day? (You could call this breakfast-and-bedding.)

I've not seen any mention of this anywhere, so I'm wondering if there is a problem with it. Obviously you need to lay your hands on the cash for one day to purchase the shares but assuming that's doable, is there any reason this shouldn't work? As far as I can see from the tax law, the bed-and-breakfasting catch only applies to a sell-then-buy operation not a buy-then-sell one (apart from a buy/sell on the same day, which would always be caught by the rules).

The HMRC guide (1) talks about shares "acquired within the 30 days after the disposal".

The relevant law is TCGA92, sections 105 and 106, which is laid out here (2). S105 starts "Disposal on or before day of acquisition...".

In both cases they are talking about acquisition _after_ disposal.

I'm not allowed to post links, but you can find (1) by googling CG51560, and (2) by googling lexisweb tcga92.

Thanks in advance for any advice.

Biggles

I think this is covered by the 'pooling' rules. So if you have 100 shares bought at 50p, then later buy another 100 shares at their current price of 250p, you have 200 shares at an average of 150p. If you then sell 100 at, say, 250p the next day, you have made a gain of 100 * 100p = £100.

You then hold the remaining 100 shares, still at their average cost of 150p, retaining another £100 gain.

So you haven't really achieved a great deal; the only way to 'clear the slate' would be to sell your shares and wait 31 days before buying again in the hope the price won't be too different.

AaronAGString

Thank you for your reply. That's a very good point (which I hadn't thought of).

But I don't think it's a deal breaker unless you need to crystallise all (or nearly all) of your gains ('clear the slate' as you put it) at once. If you only want to realise some of the gains it should still work, though you have to buy/sell more shares than you would have had to sell/buy in the traditional way.

Working with your example, when the share price goes up to £2.50, you have made a total gain of £200 on paper. Suppose you want to realise an actual gain of £40, and leave the remaining £160 gain behind for another year.

If you do a traditional sell/buy then you need to sell/buy £40/(£2.50-£0.50) = 20 shares.

But if you do a buy/sell then you need to buy/sell 25 shares. That's because when you buy 25 shares, your total pool value is 100*50p+25*250p = £112.50, and your average pool value is £112.50/125 = 90p. Then when you sell 25, your gain is 25*(250p-90p)=£40.

In general, if you want to realise a proportion p of your paper gains, then you have to sell/buy 1/(1-p) times as many shares as you would have had to buy/sell in the traditional way. This will get unworkable if p is close to 1 (no-one is going to sell/buy £1m worth of shares to realise a gain of £1k), but is presumably manageable if p is not too big. (p=0.2=£40/£200 in the above example.)

bowlhead99

Biggles wrote: »

So you haven't really achieved a great deal; the only way to 'clear the slate' would be to sell your shares and wait 31 days before buying again in the hope the price won't be too different.

But effectively you *have* achieved something useful because instead of sitting there at year end carrying £200 of unrealised gains into the new tax year, you have cashed in £100 of realised gains and only have £100 unrealised gains to take forward to a new tax year.

Imagine it was not 100 shares but 10,000 shares with a cost of £5k and market value of £25k. There is £20k of unrealised gain there. If you can find another £25k (perhaps an unsecured personal loan over a year or two but you can pay it off before any serious interest is due), you can effectively "average up" your price of the shares in the "section 104 holding" pool from £5k per 10,000 shares to £15k per 10,000 shares.

Then when you conveniently sell back 10,000 shares on Monday for the £25k you paid for them on Friday, BOOM you made a £10k profit out of nothin', because the £25k proceeds exceed the (newly increased) £15k cost.

Obviously creating a huge £10k taxable gain without any cash to show for it is not necessarily a desirable thing. However in this case when you are sitting at the end of March it would be quite handy to suddenly create a gain which instantly gets killed by your annual exemption and leaves you holding the same assets with a higher cost base going forward.

If you hadn't done that, then by the following Christmas when you no longer want the shares you would face selling them for £20k profit and paying tax on them at up to 28% on whatever doesn't fit in the actual exemption. Or only selling half of them to use up that year's exemption and holding the rest longer than you really want, in the hope of reaching the next tax year but risking a big crash taking your gains away.

So, the plan is OK but it depends on

(a) you being able to afford to double your share holding to cash out half your gain (or maybe quadruple your holding to cash out three quarters of your gain), and

(b) when you are sitting there with 2x or 4x your comfortable level before selling the next working day, no big event happens which screws you over with a heavily geared loss.

Obviously you can't buy on the same day as the sale or the 30 days after the sale or the B&B rules catch you. So buying ahead seems the only way to do it, which is cash- or credit- intensive.


*ah, I see you replied while I was replying, I think we agree.

AaronAGString

Thank you for your reply. I agree with what you say (apart from I don't see why you have to borrow money for a year; surely you only need it for one day?).

Yes, the point would be to rebase the Section 104 holding at a higher value, so putting the annual CGT allowance to some use. Eventually some years down the line I might properly sell the shares and get some cash (hopefully - assuming they haven't crashed by then).

The risk with buy-then-sell is that the shares go down a lot over the period of 1 day. This can be compared with the conventional "sell and wait 31 days to rebuy" method where you are risking the shares going up a lot over 31 days. Other things being equal, the fluctuation over 1 day should be smaller than over 31 days, but of course there is no certainty.

(Though I suppose no-one actually sells and waits 31 days to rebuy, since there are so many legitimate workarounds. E.g., could buy slightly different shares, or could hedge the transaction, or bed-and-spouse, etc.)

bowlhead99

AaronAGString wrote: »

Thank you for your reply. I agree with what you say (apart from I don't see why you have to borrow money for a year; surely you only need it for one day?).

Yes I agree.

The mention of a 1-2 year loan was just because £25k is about the limit of a conventional unsecured personal loan with everyone from Lloyd's or Nationwide or Tesco bank or Sainsbury bank etc which have reasonable rates and are used to lending that amount of money to people with reasonable credit limits. As I said, easy enough to get a loan over a one or two year term and then just pay it off very early during a cooling off period or after only a minimal amount of interest is due. Certainly cheaper than paying your £18% or 28% CGT on your £10k gains that you didn't shelter because you missed out on catching that year's annual exemption because you couldn't bear to sell the shares for a bit.

What's the alternative solution to getting a conventional high street bank loan for £25k and then cancelling it?

Well, you could go to Big Dave the loan shark and say give us £25k, I'll pay you back on Thursday when my sale settlement comes through from my broker? Sure, that'll be 20% and if you forget to pay back we'll break your legs and kill your dog. Or go to a payday loan company and say you need £25k until payday? Oh, you have a £25k net monthly salary do you sir, haha. Or ask your bank to give you a £25k overdraft for a day for a really important stock deal? Haha sir.

Large one day loans from legitimate sources don't really exist on the high street. So the only sensible way to finance it (if you don't have a ready stash of cash or big facility via your broker) is to get a "normal" loan and then early repay it.

Obviously, small amounts like the £100 example don't need borrowing but then it is not the unrealised £100s here and there that you wasn't to use your annual exemption on, it's the big stuff.

pjread

Cover the 31 days with a spread/future/option, or look for an 'equivalent' asset to substitute?