Bed and breakfasts: the silver lining to the market rout

published 20 March 2009

The end of the tax year looms, but you can still make "some canny moves" to save money in the next few weeks, says Jennifer Hill in The Sunday Times. One trick is selling shares that have fallen in order to reduce your capital gains tax (CGT) bill, then buying them back again (often known as bed-and-breakfasting). While anti-tax-avoidance measures introduced ten years ago mean that you can no longer get any tax break by selling shares on one day and buying them back the next, bed-and-breakfasting can still be useful especially after a market plunge like the one we've seen over the last year.

The "silver lining" to the rout is that you may now have a number of holdings where profits have fallen below the CGT threshold of £9,600 or tumbled into negative territory, giving you a potential capital loss that could be carried forward to offset future capital gains on other investments, says Hill. However, if you want to buy the shares back again after crystallising this loss, you must remember that you can't do so within 30 days.

Of course, after a bear market like this, that might not be too much of a worry even if your shares bounce substantially in the next month and you have to buy them back at a higher price, you may well find that the tax relief you gain will offset this. However, if you don't want to risk waiting a month, there are alternatives. Consider a 'bed-and-Isa' (individual savings account) transaction, says Steve Lodge in the FT. As you'd expect, this involves selling shares and buying them back within an Isa to take advantage of the ongoing income and CGT shelter that the Isa wrapper provides. If you have a self-invested personal pension (Sipp), you can do a similar 'bed-and-Sipp' trick, where you also get tax relief of up to 40% on the money you pay into your Sipp to buy back the shares. Bed-and-Sipp investors should take advantage of this while they can, since "there could be scope for restructing the [tax] relief" in the next budget.