Redmayne-Bentley Investment Column: Bed and shelter
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YOU may, on occasion, find a seasoned investor lamenting the demise of Bed and Breakfast. Don’t be alarmed, they are not missing a full-cooked English and a set of net curtains, but the now defunct practice of selling stock in order to crystallise a gain, then buying it back in order to maintain their exposure. ‘Bed and Breakfast’ was killed off by the introduction of the 30-day rule in 1998. Now any purchase of a stock made within 30 days of a sale of that stock is treated as the original purchase, thus eliminating the gain you wanted to crystallise and leaving you with an unrealised gain that you will have to pay capital gains tax (CGT) on when you sell again. However, there are still other tools and techniques that can be used in these last few days of the tax year to make the most of your investments by sheltering funds and gains from the tax man. In the first instance, look to use your tax shelters because once the tax year is over the allowance is lost. Even if you don’t have enough free cash you can use the first of the Bed and shelter exercises – a ‘Bed and ISA’ – to make the contribution. This is the process whereby you sell existing shares, crystallising your gain, then use the proceeds to fund an ISA contribution and buy the shares back within the tax shelter. Many brokers offer favourable commission rates for doing this. An ISA is a valuable tool in sheltering your investments from tax. This year each individual can put £10,200 into a stocks and shares ISA. A smart investor apportions their portfolio to maximise the benefits; rather than looking at shares first look at fixed interest and property investments. Whilst dividends are all paid net of ten per cent tax, income payments on fixed interest investments are paid gross in an ISA, with no tax to pay, saving even a basic rate taxpayer 20 per cent tax compared to if the investment was held outside the tax shelter. Similarly, property income distributions (PIDs) from Real Estate Investment Trusts (the likes of Land Securities and Hammerson – respectively the property developers responsible for the Trinity Leeds and Eastgate Quarter developments in the city) are also paid gross with no tax to pay in an ISA. Outside of an ISA PIDs are treated as non-savings income and therefore taxed at your marginal rate of income tax – a higher rate than a dividend. Another way to Bed and shelter is the ‘Bed and Spouse’. This is similar to the ‘Bed and Breakfast’, but instead of buying the shares back in your own name, you buy them back in your spouse’s name. As a family unit you maintain exposure, but the spouse has a new book cost from which to calculate a gain when the shares are sold again. Each individual has a personal allowance for capital gains of £10,100. If the allowance is not used each year it is lost, making it worth crystallising gains every year. And lest we forget, shares do go down as well as up, and inevitably there will be losses along the way. Losses on investment make useful tax planning tools, especially if a recovery looks unlikely. A realised loss can be carried forward indefinitely offsetting your gains and bringing them down below your tax-free personal allowance. The tax year end is not only the deadline for ISAs and using your CGT allowance, but also for pensions – and this year it is more critical than ever. The current limit for pension contributions is the lower of your entire salary or £225,000. Those fortunate souls able to contribute their entire salary to their pension should beware though, from 6th April the contribution limit for pensions will be reduced to just £50,000, albeit with the ability to carry back and up the contribution if the full amount wasn’t made in previous years. If you have a Self-Invested Pension (SIPP) you can sometimes even ‘Bed and SIPP’ – selling shares you own and using the proceeds to contribute to a SIPP. This is not as easy as an ISA because the contribution must go via the pension trustee, but it is nevertheless possible. An unknown commentator once said ‘Only two kinds of people complain about taxes: men and women’. Man or woman, I have just outlined some ways to mitigate tax before the tax year end is upon us and how to make the most of the investments within your tax shelters. With my job done I’m going to Bed and Sleep. For more information on Redmayne-Bentley’s ISAs and SIPPs please visit www.redmayne.co.uk/tax/desk or call the ISA and SIPP department on 0113 200 6580 quoting The Business Desk. For details on how Redmayne-Bentley’s investment managers can utilise tax shelters in portfolio construction please email g.mitchell@redmayne.co.uk or call 0113 200 6598 quoting The Business Desk. More articles in
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