BN 27 - Capital Gains Tax: “Bed And Breakfasting Rules”

Who is likely to be affected?

1. Individuals and trustees.

General description of the measure

2. This measure amends the capital gains tax (CGT) “bed and breakfasting” rules to counter tax avoidance schemes which exploit the bed and breakfasting rules in certain circumstances to ensure that no CGT is chargeable on substantial gains. One such scheme was used in the case
of Davies v Hicks, in which it was held in the High Court that no such tax was payable in respect of a disposal of shares made by the trustees of a settlement. The trustees had ceased to be resident in the United Kingdom after making the disposal but before acquiring identical shares within 30 days after the disposal). There has also been a disclosure to HM Revenue and Customs of a different scheme which purports to exploit these rules.

Operative date

3. The amendment will apply in relation to acquisitions made on or after 22 March 2006, as explained in paragraphs 7 to 9 below.

Current law and proposed revisions

4. The CGT bed and breakfasting rules are contained in section 106A(5) of the Taxation of Chargeable Gains Act 1992. They form part of the rules that apply in certain circumstances where there is a disposal of “securities”. In section 106A, “securities” means assets which may not be separately identifiable, such as securities and shares.

5. These rules are needed for cases where a person who has acquired securities in a number of transactions at different times disposes of some of them. Identifying the securities disposed of determines what amounts of cost are allowed in calculating the capital gain or loss arising on the disposal, and, in the case of a gain, what taper relief is due.

6. The bed and breakfasting rules are designed to prevent individuals and others within the charge to CGT disposing of shares or securities and acquiring identical ones shortly afterwards for the purpose of realising a capital gain free of tax (because it is covered by the annual exempt amount) or a capital loss (which can be set off against chargeable gains to reduce a tax liability) while still, in effect, holding on to the investment.

7. Section 106A(5) applies where, within 30 days after the disposal, the person who made the disposal acquires securities which are identical to those disposed of. Its effect is that the capital gain or loss is calculated as though the securities disposed of were, as far as that is possible, those acquired in the 30 day period. If there is more than one acquisition of securities in the 30 day period, the securities disposed of are identified as far as possible with those acquired earlier in that period rather than those acquired later. In most circumstances the price received on the disposal is likely to be very similar to the price paid shortly afterwards to acquire identical assets. As a result any gain or loss arising on the disposal is likely to be small.

8. This amendment will prevent section 106A(5) applying in relation to acquisitions made at times when the person referred to in paragraph 7 above is neither resident nor ordinarily resident in the United Kingdom. It will also prevent section 106A(5) applying in relation to acquisitions made at times when that person is resident or ordinarily resident in the United Kingdom but is “Treaty non-resident”. (A person who is regarded as resident in a territory outside the United Kingdom for tax treaty purposes is “Treaty non-resident”.) Where the amendment has effect, the gain or loss on the disposal will be calculated on the basis that the securities disposed of were acquired before the disposal rather than being those acquired within 30 days after the disposal.

9. The amendment will apply in relation to acquisitions made on or after today, irrespective of when the disposal was made.

Further advice

10. If you have any questions about this change, please contact Colin Weston on 020 7147 2764.