Can you leverage unused CGT allowance in the following way?

sgog

Suppose you have an investment portfolio whose current capital gains are lower than the allowance for the year.

In April, the allowance will reset (and reduce), so you will lose all the unused allowance.

Now, let's say that instead, you both buy an asset (e.g., stock) and short the same asset for the same quantity.
(You may have to use a separate trading account, so these won't cancel out).

So far, other than paying dealing fees and spreads, we have generated 0 exposure to the asset. 

Then, just before the tax year ends, let's say that the asset went from price X to price Y.
If X<Y, the asset appreciated in price, so the long position gains and can be used with this year's allowance.
Similarly, if X>Y, the short position can be used.

The benefit is that the other position loses can we may report this loss to minimize future CGT.

Am I missing something?

eskbanker

Sounds very much like the tax tail wagging the investment dog, and there are no guarantees that there'd be enough price movement over the next five weeks to give you anything to use towards the CGT allowance?

talexuser

Sounds like if there isn't a large volatility you'll lose out from dealing and other spread fees? And the people whose business it is to calculate and make profits from spreads know less than or are hopefully more unlucky than you?

EthicsGradient

Might it be simpler to use normal ways of utilising the CGT allowance, eg Bed and ISA, or, if you've used up your ISA contribution limit this year, selling something you have a gain on outside the ISA, selling something else in the ISA for the same amount, and buying each in the other account? Or sell something outside, and buy something similar, but not identical to it?

CFDs, which are, as far as I can tell, what you'd need to use to list them as capital gains or losses, seem to charge fees while they're open. As eskbanker says, how much of a gain or loss in 5 weeks do you think you can get from something that the fees are worth getting some loss reportable in 2023-24?

Secret2ndAccount

Is it possible; is it legal?  I think the answer is yes.
Simplest example I can think of is to buy TSLA (Tesla) and TSLQ (Short Tesla). As long as the price of Tesla moves significantly, then one of them makes a gain, and you can use your CGT allowance to realise that gain.
Traders in the US do this because of their CGT rules. If they have held a stock for some time, and are sitting on a profit, and they think the stock will go down, then they short it rather than sell it. I think their taxes on a long term gain must be higher than their taxes on the short term profit if the stock goes down. Under UK rules, by the time you have paid all the costs, I don't see where a profit comes from. If you are smart enough to pick investments so as to make this profitable then why not not just pick profitable investments and go long, then make use of your annual allowance to maximise withdrawal of the profits without paying CGT.

sgog

eskbanker said:

Sounds very much like the tax tail wagging the investment dog, and there are no guarantees that there'd be enough price movement over the next five weeks to give you anything to use towards the CGT allowance?

I guess you can leverage this to ensure that there's enough movement.

sgog

JamesRobinson48 said:

(You may have to use a separate trading account, so these won't cancel out).

For CGT purposes, same day buy and sell transactions in the same security would be matched. In other words, using your terminology, they will be deemed to cancel out even if one is in a separate trading account.  The same would equally apply if the sale precedes the buy by 30 days or less.

This is true, but only a minor technicality.
See Secret2ndAccount's answer, or simply think of buying a synthetic contract (buying call and selling put on the same strike) while shorting the underlying asset.

sgog

EthicsGradient said:

CFDs, which are, as far as I can tell, what you'd need to use to list them as capital gains or losses, seem to charge fees while they're open. As eskbanker says, how much of a gain or loss in 5 weeks do you think you can get from something that the fees are worth getting some loss reportable in 2023-24?

Suppose that one still has £10,000 CGT allowance unused for the year -- doing this sort of trick can save £2,800 in CGT tax in future years (especially as the allowance is going down), not pocket change.

EthicsGradient

sgog said:

EthicsGradient said:

CFDs, which are, as far as I can tell, what you'd need to use to list them as capital gains or losses, seem to charge fees while they're open. As eskbanker says, how much of a gain or loss in 5 weeks do you think you can get from something that the fees are worth getting some loss reportable in 2023-24?

Suppose that one still has £10,000 CGT allowance unused for the year -- doing this sort of trick can save £2,800 in CGT tax in future years (especially as the allowance is going down), not pocket change.

If the price movements happen to work out for you. But you have to use considerable money (far, far from "pocket change") to buy the instruments to get £10k CG in this short time, and you're then taking a gamble on the remaining holding between the time you sell the first in 2022-23, and selling the 2nd in 2023-24 - what if this volatile stock loses you money in that time?  Or it might just not move that much in the3 first place, and you've paid the fees for very little CGT advantage.

You'd need to properly work out the fees involved, the opportunity loss for the money you put in while this wheeze operates, and the chances (based on past price movements) of it actually working in any significant sense. £2,800 is if you're a higher rate payer with propery gains. The rate is 20% for investments.

eskbanker

sgog said:

eskbanker said:

Sounds very much like the tax tail wagging the investment dog, and there are no guarantees that there'd be enough price movement over the next five weeks to give you anything to use towards the CGT allowance?

I guess you can leverage this to ensure that there's enough movement.

But that's the fundamental point, it would involve guesswork, as well as potentially substantial funding and not insignificant risk, so you'd need to evaluate carefully if the juice is worth the squeezing - as far as I can see your arbitraging is only really motivated by a desire to use an allowance artificially, rather than to actually make money, so it seems an odd objective?

masonic

sgog said:

eskbanker said:

Sounds very much like the tax tail wagging the investment dog, and there are no guarantees that there'd be enough price movement over the next five weeks to give you anything to use towards the CGT allowance?

I guess you can leverage this to ensure that there's enough movement.

If you wish to trade derivatives, why not just switch over to spread betting, then all of your proceeds are tax free. The fact that 70-80% of people trading in this manner lose money should be a clue to your own likelihood of success.