The internal fund tax of wrappers such as bonds and Open Ended Investment Companies (OEICs) can be confusing.
The annual CGT exemption for clients in 2018/19 is £11,700. Given that any unused exemption may not be carried forward then there is clearly a tax year end planning opportunity to sell and buy back the shares shortly afterwards to realise a gain up to £11,700 and thereby increase the base cost for future disposals (or to realise an allowable loss). This practice is known as ‘bed and breakfasting’ as it was originally used to describe share transactions in which shares were sold one day and reacquired the following morning.
Sounds straightforward, but HMRC weren’t too keen on the tax rules being exploited in such a simple manner and many years ago introduced anti-avoidance rules to combat this. These rules are best explained with a simple example.
Alison has 9,500 shares in an OEIC fund. On 5 April 2019 she sells 4,000 shares and purchases 500 identical shares on 6 April 2019. Her disposal of 4,000 units is identified as follows:
500 against shares purchased on 6 April
3,500 against the original shares
So how do these anti-avoidance rules work? They simply match disposals against acquisitions on the same day and against acquisitions within the 30 days to counter the practice of selling and buying back shares shortly afterwards. The rules only kick in when the client is buying and selling shares in the same fund and class.
Clients might be forgiven for thinking that the only solution is to buy the shares back after 30 days and accept that they will be out the market for a slightly longer time than hoped. That is indeed a possibility but remember that there is nothing to prevent a sale from the client’s own name followed by a repurchase within his/her ISA, bond or pension. Each of these tax wrappers offer their own particular merits depending on client circumstances. So, why does this strategy work? It works because the shares are not being “acquired by the same person in the same capacity.” Simple!
Here’s a simple fact though – within an OEIC, no tax is payable on capital gains and instead the client is potentially liable to capital gains tax (CGT) on disposal of shares.