Money tip #131 – Bed and Breakfasting is back – and other alternatives

If you are looking for ways to avoid or mitigate capital gains tax (CGT) on your investments then first read my post How to realise capital gains tax without paying tax.

Bed and breakfasting – the return

But in the good old days one way to cut your tax bill on a share portfolio was to simply sell shares on which you’d made a gain, to use up some of your CGT allowance, and then the very next day buy back shares in the same companies. This was called bed and breakfasting, but it is no longer possible. Under current legislation you can’t buy back the same shares you sold within 30 days if you want to crystallise a capital gain.

But there's a "new – and legal – way" to use the bed and breakfasting idea, as long as you "favour funds over individual shares", says Richard Fletcher in The Sunday Telegraph.

The way you do this is to sell your fund holdings and immediately buy a different but similar fund. For example, sell a holding in Invesco Perpetual Income (which is a collective investment fund that invest in UK shares) and immediately buy Invesco Perpetual High Income. After the '30 days' are up you could switch back the other way.

The net result would be that you would still have a holding in Invesco Perpetual Income but have realised enough capital gains in order to utilise your annual CGT allowance. The downside to this process is that you will likely incur sale/switch charges, plus the two funds are not strictly the same (Invesco Perpetual High Income can invest in corporate bonds unlike its straight Income stable-mate). But despite this, investors may find this an interesting way to not only mitigate CGT but also to remain invested in the markets throughout the process.

Other alternatives to Bed and Breakfasting

Bed-and-spousing (Money tip #64) – Another similar way to mitigate CGT is called Bed-and-spousing. You simply sell an investment to realise the capital gain – taking into account your annual allowance, of course – and then your partner repurchases the same assets in their own trading account. This way you keep the assets in the family, essentially keeping you portfolio intact, but you’ve defused the gain. This technique can be used with shares as well as investment funds. But obviously the process does incur transferring assets across to your spouse until the 30 days are up, at which point you could un-engineer the process so the holdings were once again in your name.

Bed-and-ISA-ing (Money tip # 65) – This is the same idea as bed-and-spousing, but this time you re-buy within an ISA. (see my post Money tip #22 – Use your annual ISA allowance for more information on ISAs). Purchasing back the same assets in an ISA doesn’t violate the 30-day rule.

image by by Daquella manera - flickr