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Bed & ISA and Reporting Limits

Practical Issues
Citizen7
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Bed & ISA and Reporting Limits

#454299

Postby Citizen7 » October 30th, 2021, 10:53 am

I may have this all wrong, but, on the off chance I could be on to something, I thought I’d give it a shot and ask y’all on here if there is any substance to what I am thinking. All replies gratefully received.

This is a question about the tax treatment of a what is commonly known as a Bed & Isa transaction for shares. It is also a question about reporting limits for (share) disposals in the tax year….and whether there is any ‘overlap’ between the two.

My understanding is that when a share disposal is made - let’s say for £20,000 as that is the maximum that can be put into an ISA in any tax year - then that disposal is effectively ignored for Capital Gains Tax (CGT) purposes. As one writer put, paraphrasing a little on my part, the disposal is not considered to have ‘crystallised’ because the share sold was repurchased within a 30 day period. Writers have said that the transaction is ‘treated as if it never happened’ or the like.

Thus I am wondering if the Bed & Isa transaction can also be ‘ignored’ for the purposes of establishing whether or not the relevant reporting limits have been exceeded for the tax year thereby requiring those share disposals made in addition to the ‘Bed & Isa’ transaction to be detailed/reported on a person’s annual tax return. Does or could the wording ‘ignored for CGT purposes’ be taken to include ‘reporting limits for CGT purposes?’

To elaborate a little further…the current reporting limit for total disposals is, I understand, £49,200 (four times the limit for Total Gains, i.e., £12,300). I am all for the simple life and will give serious thought to arranging my affairs - within reason - in any one tax year such that I do not exceed these limits. However, I have already done a Bed & ISA for this year and would like to make a number of not insubstantial share disposals both this tax year and next, but would prefer not to do so at the expense of exceeding reporting limits.

Thus, if I Bed & ISA shares to the value of 20k then does that count towards the £49,200 reporting limit for the year? If a ‘gain’ of, say, 5k ‘arises’ on the same Bed & ISA transaction, does that count towards my £12,300 reporting limit.

(I recall reading that there was a third ‘reporting limit’ for gains before any offset for losses’, but was unable to find any reference for that prior to writing this post.)

At the risk of labouring the point, if the Bed & ISA transaction did not count towards the total for reporting limits then it seems to me that I could, for example, make total ‘disposals’ to the value of £69,200 (£20,000 for the Bed & ISA and £49,200 in addition) in the tax year and not be required to report anything at all. Could that be the case?

Lastly, I think, and at the risk of outstaying my welcome, on the off chance that there is some merit to the above or maybe even if it is definitely the case, then I would be further grateful for any details regarding what aspect of tax law I would be relying upon in taking the approach proposed. In short, something I could quote to HMRC if I was ever subject to a tax inspection at some future point.

I hope I have explained myself clearly. Thank you for taking the time. All responses and replies will be gratefully received…including, should it be the case, that I am totally mistaken and none of the above applies.

Much obliged.

C7

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Re: Bed & ISA and Reporting Limits

#454302

Postby mc2fool » October 30th, 2021, 11:01 am

Citizen7 wrote:Thus, if I Bed & ISA shares to the value of 20k then does that count towards the £49,200 reporting limit for the year? If a ‘gain’ of, say, 5k ‘arises’ on the same Bed & ISA transaction, does that count towards my £12,300 reporting limit.

Yes. Yes.

Citizen7 wrote:At the risk of labouring the point, if the Bed & ISA transaction did not count towards the total for reporting limits then it seems to me that I could, for example, make total ‘disposals’ to the value of £69,200 (£20,000 for the Bed & ISA and £49,200 in addition) in the tax year and not be required to report anything at all. Could that be the case?

No.

Sorry! :D

genou
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Re: Bed & ISA and Reporting Limits

#454307

Postby genou » October 30th, 2021, 11:12 am

Citizen7 wrote:My understanding is that when a share disposal is made - let’s say for £20,000 as that is the maximum that can be put into an ISA in any tax year - then that disposal is effectively ignored for Capital Gains Tax (CGT) purposes. As one writer put, paraphrasing a little on my part, the disposal is not considered to have ‘crystallised’ because the share sold was repurchased within a 30 day period. Writers have said that the transaction is ‘treated as if it never happened’ or the like.



C7


This is incorrect. The 30 day rule does not apply where the repurchase is inside an ISA.

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Re: Bed & ISA and Reporting Limits

#454310

Postby Alaric » October 30th, 2021, 11:19 am

Citizen7 wrote:My understanding is that when a share disposal is made - let’s say for £20,000 as that is the maximum that can be put into an ISA in any tax year - then that disposal is effectively ignored for Capital Gains Tax (CGT) purposes.


That understanding is incorrect. It's only when you repurchase the same share outside a tax shelter that the one month window of linkage between sale and purchase applies.

One dodge that is available to utilise CGT allowances is when you invest in Index Trackers. Find an Index with more than one tracker and periodically flip between them. If each time incurs a capital gain you can utilise the annual CGT limit whilst also increasing the base cost.

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Re: Bed & ISA and Reporting Limits

#454332

Postby Gengulphus » October 30th, 2021, 12:57 pm

Citizen7 wrote:My understanding is that when a share disposal is made - let’s say for £20,000 as that is the maximum that can be put into an ISA in any tax year - then that disposal is effectively ignored for Capital Gains Tax (CGT) purposes. As one writer put, paraphrasing a little on my part, the disposal is not considered to have ‘crystallised’ because the share sold was repurchased within a 30 day period. Writers have said that the transaction is ‘treated as if it never happened’ or the like.

Thus I am wondering if the Bed & Isa transaction can also be ‘ignored’ for the purposes of establishing whether or not the relevant reporting limits have been exceeded for the tax year thereby requiring those share disposals made in addition to the ‘Bed & Isa’ transaction to be detailed/reported on a person’s annual tax return. Does or could the wording ‘ignored for CGT purposes’ be taken to include ‘reporting limits for CGT purposes?’

There is a misunderstanding here - either the writers concerned have misunderstood what the CGT rules say, or you've misunderstood what they have said, or both. I certainly have encountered newspaper articles and the like that haven't understood this point, or that have hidden some important details behind the word "effectively", so either explanation is entirely possible.

The actual situation is that some share transactions are ignored for CGT purposes - the main cases I'm aware of that individual investors are at all likely to encounter being when the transaction occurs entirely within an ISA, SIPP or other tax shelter. They don't however include cases where whether the transaction is ignored or not depends on the timing of other transactions in the same share.

A bed & ISA transaction is really just a package deal (often with the broker offering favourable terms compared with doing the transactions separately) consisting of three separate transactions done in quick succession: a sale outside the ISA, subscription of the sale proceeds to the ISA, and a purchase inside the ISA. And that's how CGT treats it - it pays attention to the sale outside the ISA, it ignores the ISA subscription because that doesn't itself involve acquiring or disposing of assets, and it also ignores the purchase inside the ISA because that's a transaction occurring entirely within the ISA. So as far as CGT is concerned, it's just a sale of the shares concerned, and the purchase within the ISA doesn't cause the same-day or 30-day rules to apply.

The same-day or 30-day rules might of course apply if on the same day as the bed-and-ISA transaction or the following 30 days, you were to make a separate purchase of the same type of share outside the ISA. If you were to do that, those rules would not cause CGT to ignore the sale part of the bed-and-ISA transaction to be ignored - instead, they would cause it to be 'matched' for CGT purposes to that separate purchase (*), so that the gain or loss is calculated from the purchase costs of that separate purchase, not the original purchase cost of the bed-and-ISAed shares. I.e. there would still be a gain or loss calculated for the bed-and-ISAed shares, but unless the share price moves an unusually large amount between the bed-and-ISA transaction and the separate purchase, it will be a small one (**). That might be useful in some circumstances (though I think pretty rare ones) to change a large gain realised by the sale part of the bed-and-ISA transaction into a small one, which might bring your total gains (before offsetting losses) below the CGT allowance and so avoid having to report your CGT for that reason. It won't however ever change the disposal proceeds of the sale part of the bed-and-ISA transaction, so if your total disposal proceeds are over 4 times the CGT allowance, it won't help.

(*) Assuming the separate purchase is of the same number of shares as the sale part of the bed-and-ISA transaction sold, that is. If they are of different numbers of shares, the larger transaction will need to be apportioned.

(**) This is where writers of newspaper articles and the like are particularly likely to misunderstand the situation or over-simplify it. The 30-day rule was introduced as an anti-bed-and-breakfasting measure, bed-and-breakfasting being the old technique of selling just before the end of one trading day and repurchasing just after the start of the next to realise a large gain (in order to use up one's CGT allowance) or a large loss (in order to offset them against gains already in excess of one's CGT allowance) without taking much risk of the share price moving significantly while one isn't invested in the share. It made that technique useless by almost always preventing the realised gain or loss from being large, and in particular making any CGT effect that one might obtain from it both just about as likely to be negative as positive and probably smaller than the trading costs involved. So for some CGT purposes, one might reasonably regard it as effectively making the bed-and-breakfasting technique almost ignored by CGT. But that's not at all the same thing as "ignored by CGT"!

Gengulphus

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Re: Bed & ISA and Reporting Limits

#454340

Postby Lootman » October 30th, 2021, 1:40 pm

Gengulphus wrote:A bed & ISA transaction is really just a package deal (often with the broker offering favourable terms compared with doing the transactions separately) consisting of three separate transactions done in quick succession: a sale outside the ISA, subscription of the sale proceeds to the ISA, and a purchase inside the ISA. And that's how CGT treats it - it pays attention to the sale outside the ISA, it ignores the ISA subscription because that doesn't itself involve acquiring or disposing of assets, and it also ignores the purchase inside the ISA because that's a transaction occurring entirely within the ISA. So as far as CGT is concerned, it's just a sale of the shares concerned, and the purchase within the ISA doesn't cause the same-day or 30-day rules to apply

That process is certainly what brokers mean by "bed and ISA". It is a bundled service designed to save the investor some effort, and possibly the odd commission here and there (but stamp duty on the repurchase is still payable which is often the biggest cost of a buy trade).

It doesn't work perfectly however, in the sense that there are still some frictional costs, and the result is that you do not end up with exactly the same number of shares. For instance you might sell 1,000 shares and then the repurchase is for 997 shares. That might not bother some people but it would irk me.

Also note that it is unlikely that the subscription to the ISA would coincide with the allowable annual subscription limit. So there will need to be at least one more subscription, and presumably transaction, in order to maximise your annual subscription, assuming that is your aim anyway.

As a result of these factors, I prefer a "home made" bed-and-ISA where I sell the taxable holding, manually subscribe the maximum subscription to my ISA, and then buy the same holding for my ISA. I might pay an extra commission but I have more control over the process.

Incidentally, I am not aware what the penalties are for failing to declare capital gains where the amount of the sales exceeds the reporting limit BUT no CGT is due anyway. I imagine the penalty for that is trivial compared to the penalty for failing to report an annual gain that is larger than the annual CGT-free limit.

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Re: Bed & ISA and Reporting Limits

#454486

Postby Gersemi » October 31st, 2021, 9:46 am

Lootman wrote:
Incidentally, I am not aware what the penalties are for failing to declare capital gains where the amount of the sales exceeds the reporting limit BUT no CGT is due anyway. I imagine the penalty for that is trivial compared to the penalty for failing to report an annual gain that is larger than the annual CGT-free limit.


You know, I've always wondered about that. There are penalties for failure to notify, but they are tax geared, so if there is no tax due then the penalty would be nil. To be honest I can only think that it would be treated as an aggravating feature if there were chargeable gains (maybe you calculated that they would be under the limit, but your calculation was wrong) or it could be a reason for them to open an enquiry if HMRC were aware that you had made disposals over the limit and hadn't declared them. But I haven't found any way for them to charge a penalty if there is in fact no gain.

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Re: Bed & ISA and Reporting Limits

#454540

Postby Citizen7 » October 31st, 2021, 11:48 am

Thank you to all who responded to my query, I am, at least, clear now as to how to proceed.

The ‘three separate transactions’ approach was particularly helpful.

All very much appreciated, thanks again.

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Re: Bed & ISA and Reporting Limits

#454551

Postby genou » October 31st, 2021, 12:01 pm

Citizen7 wrote:Thank you to all who responded to my query, I am, at least, clear now as to how to proceed.

The ‘three separate transactions’ approach was particularly helpful.

All very much appreciated, thanks again.

If you want to have the ISA acquire the same number of shares as are sold in the dealing account, if you have enough balance in cash inside the ISA, it is very likely that your broker will allow you to use that balance to keep the holding the same size. I haven't encountered a broker who would not do this as part of a bed-and-ISA. It does save a dealing charge, and a B&I is normally done on minimal spread, so you get that advantage as well.

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Re: Bed & ISA and Reporting Limits

#454563

Postby Lootman » October 31st, 2021, 12:23 pm

genou wrote:
Citizen7 wrote:Thank you to all who responded to my query, I am, at least, clear now as to how to proceed.

The ‘three separate transactions’ approach was particularly helpful.

All very much appreciated, thanks again.

If you want to have the ISA acquire the same number of shares as are sold in the dealing account, if you have enough balance in cash inside the ISA, it is very likely that your broker will allow you to use that balance to keep the holding the same size. I haven't encountered a broker who would not do this as part of a bed-and-ISA. It does save a dealing charge, and a B&I is normally done on minimal spread, so you get that advantage as well.

Wouldn't you have to ring your broker to arrange that though? If done through an online system then the situation I described is what happens, i.e. your 1,000 taxable shareholding becomes (say) 997 shares in your ISA.

And if done via phone then the commissions may be higher.

As for "minimal spread", in theory the broker could do this at zero spread, simply via the bookkeeping mechanism of internal crossing. So both trades could be at the mid-price. But again the brokers don't do that in my experience. Doesn't matter much for the most liquid shares and many ETFs, that have minimal spreads anyway. But with smallcaps and some investment trusts, the spread can be 5% or more.

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Re: Bed & ISA and Reporting Limits

#454568

Postby genou » October 31st, 2021, 12:48 pm

Lootman wrote:
genou wrote:
Citizen7 wrote:Thank you to all who responded to my query, I am, at least, clear now as to how to proceed.

The ‘three separate transactions’ approach was particularly helpful.

All very much appreciated, thanks again.

If you want to have the ISA acquire the same number of shares as are sold in the dealing account, if you have enough balance in cash inside the ISA, it is very likely that your broker will allow you to use that balance to keep the holding the same size. I haven't encountered a broker who would not do this as part of a bed-and-ISA. It does save a dealing charge, and a B&I is normally done on minimal spread, so you get that advantage as well.

Wouldn't you have to ring your broker to arrange that though? If done through an online system then the situation I described is what happens, i.e. your 1,000 taxable shareholding becomes (say) 997 shares in your ISA.

And if done via phone then the commissions may be higher.

As for "minimal spread", in theory the broker could do this at zero spread, simply via the bookkeeping mechanism of internal crossing. So both trades could be at the mid-price. But again the brokers don't do that in my experience. Doesn't matter much for the most liquid shares and many ETFs, that have minimal spreads anyway. But with smallcaps and some investment trusts, the spread can be 5% or more.



I've never been charged above the online commission, but yes you have to phone. I'm not convinced you can reduce the spread to zero. It's an ISA requirement that the contribution has to be in cash, so the broker goes to a MM, and they need their palm crossed with something.

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Re: Bed & ISA and Reporting Limits

#455497

Postby hiriskpaul » November 4th, 2021, 9:31 am

I have occasionally passed large holdings in and out of ISAs and SIPPs and they have always had to go through a MM. Whether it is worth doing or not depends on the telephone dealing charge and the reduction in spread. I have done this with illiquid shares and bonds where the spread might go from say 2% to 0.5% or lower. Always worth trying out dummy online deals first to get a sense of what the real spread is though as this is frequently inside displayed bid/ask. Then get the phone quote and only proceed if there is a saving.


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