A summary of the share matching rules and how they eliminated the “bed and breakfast” CGT planning advantage
Attempting to balance risk and return is an age-old dilemma, but it is generally accepted that a degree of investment risk is required to gain returns in excess of the ‘risk-free’ returns available from cash deposits.
Investment risk can lead to a complete loss of capital, but often risk is the way we refer to volatility. In other words, the fluctuations in investment performance over time, resulting in positive and negative price movements.
While volatility can be unsettling, it does provide opportunity for planning and positive engagement with clients at difficult times.
Bed and breakfasting
One of the ways that investors used to attempt to manage the tax liability of their investments was ‘bed and breakfasting’. It is a strategy of selling shares or funds when the price had risen, followed by immediately re-investing the gains into the same shares or funds, so as to realise a capital gain within the available capital gains tax (CGT) allowance, without incurring market timing risk (the risk of the price going up while you are disinvested). This strategy could also be used to crystallise losses.
This would allow investors to effectively lower the eventual tax liability that would arise when they decided to sell the shares or funds to realise their returns.
It is, of course, still possible to do this, but the CGT advantage is mitigated by share matching rules.
Download our explanation of share matching rules and the reasons why it has made planning more challenging, along with some case study scenarios.