Can the 30-day bed and breakfasting rule act as a hedge against an increase in capital gains tax?
1st October 2024
Posted in Articles by Andrew Marr
Before March 1998, ‘bed and breakfasting’ of shares was a generally accepted piece of tax planning. This would work by an investor selling shares to realise a gain and then buying them back immediately on the market. “Why did they want to make a gain?” I hear you asking. This was usually done to crystalise a gain which was equivalent to the capital gains tax annual exemption which would otherwise have been lost. From March 1998, new rules were introduced which made this approach more difficult.
March 1998 ’30-day rule’
From March 1998, this kind of planning was somewhat scuppered by a rule that said that any acquisitions of the same shares within 30 days of a disposal would be matched with the disposal proceeds. Therefore, on the basis that acquisition costs were generally equivalent to the disposal proceeds, no gain (and no ability to use the annual exemption) arose. However, these rules did not prevent what came to be known as ‘bed and spousing’ whereby one spouse would dispose of the shares and then the other spouse would immediately acquire the shares.
The 30-day rule and anticipated rate rises
There is much speculation about the Government announcing an increase in capital gains tax rates in the 30 October Budget. Although a rate increase seems likely, nobody (except perhaps the Chancellor) knows what the quantum of any increase would be, or when it would apply from. Although a rate change could apply from the day of the Budget, it would be no surprise if any change kicked in from 6 April 2025.
This has all led me to consider whether an investor holding listed shares could use the 30-day rule as ‘a hedge’.
Example
Ray holds £1m of shares in Tesla which he paid £0.5m for some time ago. Although he has no real inclination to sell, he would rather pay tax at 20% on a gain than risk taking his inherent £0.5m gain into a 40% tax regime (or higher). Ray considers the following strategy.
- He sells his shares for £1m on 29 October 2024, prima facie triggering a £0.5m gain with £100,000 of tax liability at 20%.
- If rates go up then Ray can take a view on whether he wants to take the £100,000 tax hit which would be payable on 31 January 2026.
- If he does not want to do this then he can simply buy the shares back on the market, thus completely or largely mitigating the gain, based on the 30-day rule.
- If Ray decides to take the hit, then his wife Judith could get back into the market with no impact from the 30-day rules.
This seems to provide Ray and Judith with flexibility to trigger a tax charge at lower rates if it suits them to do so.
Forbes Dawson view
In the right circumstances, Ray and Judith’s strategy could be a good one, although there are possible costs, the main ones being as follows:
- Market spread will mean that it is unlikely (all things being equal) that the shares can be acquired at exactly the same price that they were disposed of.
- There is market risk between sale and acquisition which could go for or against the taxpayer. Given that they are contemplating a possible sell followed by a buy around Budget Day this risk will generally be higher (although perhaps less so for Tesla shares in the example).
- Stamp duty (at 0.5%) will usually be payable on the reacquisition of any shares.
- It is possible (although probably unlikely) that the Government could change the 30-day legislation, leaving Ray with a gain whether he wants it or not.
- If Tesla’s share price falls in the future, commercially Ray and Judith would not realise a £0.5m gain at all but would have been taxed on it. Although, they may realise a capital loss, this would only be useful if they have gains against which it can be offset.
Ray may well feel that the benefits of this planning outweigh the risks, particularly if there is a chance of him avoiding a 20% tax hike!
