How the capital gains tax and what's the 30 days rule?

Question

I trade shares, but I am not sure about Liability. I am aware of the CGT allowance, but what's the 30days rule and what about shares being traded on same day. Can sell just before 5th April to realize my profit then buy back on 6th? for me, this lock legal and legitimate, because I should be taxed on the profit at the point on the 5th? please help...

commenting on the first answer: so you mean if traded shares in less 30 days from the 4th April 07 for example, the profit (or loss) from this traded should be counted as if traded before 5th April 07 (end of tax year) and consequently from the previous tax year??

to the second answer: Thx for your help!! but I am not really trying to hide or forge anything!! i am trying to understand the law, and I am still under my allowance anyway.

Thx guys, but I really the law now. So if i buy the same shares within 30days, I am considered as I still own them from the begining??? that's what I want to know. but this can be misued if it's the case. Coz you can carry your trade forward if you ares till less than your CGT allowance?

for the tax prof. forget all the discussion.....my question is simple: WHAT's the 30days rule?

Thank you Sankey B. and all of you guys who took time to explain this matter to me. now, I understand the sequence of following up the trades by HMRC, but still the I cant get the 'so what'? what this affect, my cost price of original 'buy'?? this mean if the price declined (in the 30days) I can use this to my sake?

Snakey, I know my English is not perfect, becasue I am not a native speaker, but you say: 'then for tax purposes you might as well not have sold them, because it will not make you have a capital gain'. Can you kindly explain your English. does this mean that as if I owned the shares all the time (during the gap between disposal and rebuying) and not sold them anyway? so as if the HRMC will assume that I made a gained which did not really make? Why Tax is soo taxing!!?

Answer 1

It's called Bed & Breakfasting. Any transactions involving buying and selling shares in the same company without a 30 day gap between them are disregarded for CGT purposes. It's usually done to realise a loss in one share to offset against a gain in another. Assuming you're in the UK?? If so, see the HMRC website
http://search.hmrc.gov.uk/kbroker/inldrev/inldrev/search.lsim?sr=0&nh=20&cs=iso-8859-1&sc=ir&ha=7&mt=0&qt=bed+and+breakfasting

Answer 2

The 30-day rule was put in specifically to stop people doing what you are describing.

Without the rule, people who had not made any gains in a tax year would artificially use up their annual capital gains exempt amount by selling shares on the 5th April to realise a gain just under the exempt amount. They would then buy them back on the 6th April. So at a cost of a small brokers fee and a small risk (that the shares would go through the roof overnight), they would save tax equal to their annual exempt amount multiplied by their top tax rate.

Like this (ignoring indexation):

Purchase ten years earlier: 1,000 shares for £100
Sale on 5 April 1994: 1,000 shares for £1,000
Purchase on 6 April 1994: 1,000 shares for £1,000

Gain = 1,000 proceeds less 100 cost = 900 covered by annual exempt amount
Cost carried forward = 1,000

The Inland Revenue didn't like this, because while it was "artificial" (in a sense, you hadn't really disposed of your shares) it worked - because legally, you HAD disposed of your shares and so they couldn't use any of their standard anti-avoidance devices to catch you.

And what does the Inland Revenue do when it doesn't like something? It changes the law.

So now we have the concept of matching. Shares sold are matched in order with:
1. shares bought within the next 30 days
2. shares bought ages ago
[more complex, of course, but those are the important ones]

So if you sell your shares and buy them back within the next 30 days, you are deemed - listen carefully! - to have sold the shares that you went out and bought afterwards.

Like so (ignoring taper relief):

Purchase ten years earlier: 1,000 shares for £100
Sale on 5 April 2007: 1,000 shares for £1,000
Purchase on 6 April 2007: 1,000 shares for £1,000

Gain = 1,000 proceeds less 1,000 cost = nil
Cost carried forward = £100

Bad luck!

EDITED on Wednesday afternoon: I don't understand half of what you're writing in the "additional information". It would be a lot easier to help you if you could check that what you are saying makes sense in plain English before you post it.

If you want the basic effect of the 30 day rule in really simple words, it's this:

If you buy the shares back within 30 days, then for tax purposes you might as well not have sold them, because it will not make you have a capital gain.

OK?

If you buy them back on Day 31 or any time after that, then that's fine and it works just as you were originally hoping.

You can argue that's not fair, but it is what the law says. Even if you don't think it's right.

The only way to use up any remaining annual exempt amount for 2006/07 is to sell shares today or tomorrow and either not buy them back at all, or buy them back after the 5th May 2007.

It's only the case for shares. You can still "bed and breakfast" any other capital gains assets that you might have.

OK, second edit, Friday afternoon. You are going to have to be quick if you want to make share disposals this tax year!

Right.
1. A tax charge applied when you dispose of shares.
2. If there was no 30-day rule then you would have your 5 April disposal proceeds and deduct your original cost. The difference would be your taxable gain.
3. But that isn't the case, because there is a 30-day rule.
4. The 30-day rule says that IF you buy the shares back again within 30 days, you use THAT purchase price to calculate the gain.
5. This has two effects. a) the gain is likely to be small if it exists at all, because the share price won't have moved much in 30 days. b) when you sell the shares for the second time, you will use the original purchase price i.e. what you paid when you first bought the shares.
6. If the price of the shares drops in the 30 days then you will have a capital gain. This will be the difference between the money you got on 5th April and the cost you paid when you bought them back again.
7. If the price of the shares goes up in the 30 days then you will have a capital loss for tax purposes. However, think about it - you have lost real money on this deal. If you sold the shares for £100 and bought them back for £200 then that has cost you £100 of your money. You will only get £40 in tax relief for the capital loss. So this is not a clever planning idea - even if you did have a way of knowing in advance that a share price was going to rise, which you don't, you'd be better advised to buy than to sell!!

I hope this is enough. Seriously, it's been explained in lots of different ways to you now. I don't mean to be rude because you say that English is not your first language, but if you still don't see how this works then Yahoo Answers probably can't help you any more - you need to go and see a tax advisor and sit down in a room with them and get them to go through it with you with a pen and paper however many times it takes until you understand it.

Answer 3

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Answer 4

I think that you have already gathered from the previous replies that if you sell your shares on the 5th April in order to crystallise your gain you cannnot buy them back within thirty days if you want to retain that taxable gain.

The reasoning behind these rules has already been explained but, yes, they can still be used to your advantage.

I assume from the wording of your question that you have a number of trades in a particular share. What you have to realise is that your concept of profit and the taxable profit figure may not always match up. If you have numerous trades in any tax year then the procedure to match the purchase price with the corresponding sale price is as follows.

Start at the 6th April and find the first disposal in the tax year.

You now need to match this sale of shares with a corresponding purchase (or purchases).

Firstly you match them with shares bought on the same day.

Then, if not already matched, you tie them in with shares bought in the following thirty days (from the date of sale).

If you have still not fully matched the shares sold you then work backwards through your purchases on a Last In First Out (LIFO) basis.

Then move on to the next disposal.

How about an example. Assume these facts.

Bought 2nd January 1,000 shares for £500.
Bought 1st February 1,000 shares for £700.
Sold 10th April 1,750 shares for £1,300.
Bought 1st May 500 shares for £400.
Bought 31st May 500 shares for £450.
Sold 30th June 750 shares for £700.

The cost price of the 1,750 shares sold is -

500 shares for £400, plus
1,000 shares for £700, plus
250 shares for £125

The cost of the 750 shares sold is -

500 shares for £450, plus
250 shares for £125.

You still have 500 shares remaining from the 2nd January purchase costing £250.

OK, it seems complicated but just work though it methodically and you'll get the right answer.

Answer 5

I suggest you stop trading at once, and learn the rules, or you will drown in paperwork and legal fees when the Infernal Revenue catch up with you!

All of your trades are detailed and passed to the tax office by your brokerage house. When you (or your accountant) file your taxes, the records you submit better be the same, or the tax folks get VERY fussy!

You also need to carefully read the laws regarding the "wash rule" that you are asking about... it'll bite you hard if you aren't careful!

Answer 6

As a tax expert for nearly 40 years, even I am confused by what you say you are doing!
Have they explained it to you?

Bedding the wife is so much easier, perfectly legal and you get to use your CGT allowance. If you're not married, get a "civil partner", it's still a good tax dodge.