Minimising the pain from gains

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STOCK MARKETS touched record highs this week, leaving many shareholders looking at big capital gains, writes Caroline Merrell.

One way of sheltering the gains against future capital gains tax is to bed and breakfast shares.

The shares in a portfolio are sold and rapidly bought back to establish a capital gain to use up the annual exemption of pounds 5,800. Loss-making shares can also be sold to reduce the capital gain.

The exemption, if not used in the tax year, is lost and investors may be hit by a hefty capital gains tax bill when they sell later.

Bed and breakfasting is usually carried out towards the end of the tax year when investors are carrying out general tax planning.

Commission rates on bed and breakfasting vary. Sharelink, for example, offers a rate of 0.75 per cent for deals over pounds 2,500. Many stockbrokers do not charge for the repurchase of the shares, but most have a minimum charge, and TSB, Midland and Sharelink have maximum charges of pounds 100, pounds 75 and pounds 50, respectively.

Skipton Building Society this week announced the launch of a bed and breakfast service run through a link-up with Wise Speke, the stockbroker. The total cost on a typical bed and breakfast deal of pounds 10,000 would be pounds 60.

All the major clearing banks offer deals through their stockbroking arms and many are anticipating vast increases in business volumes because of soaring stock markets. For the deal to be legitimate, there must be a clear separation between the selling and buying back of shares.

Stockbrokers are concerned that the Inland Revenue may be about to clamp down on 'bed and breakfasting' because it is concerned that, in some cases, the price of the shares on repurchase is being fixed so there is no change on the selling price.

Richard Larner, managing director of Norwich & Peterborough stockbroker Waters Luniss, said: 'The strength of the stock market will encourage people to use up their capital gains tax exemptions.'

He said business volumes in general had nearly doubled over the last year.

----------------------------------------------------------------- SHARE DEALING CHARGES ----------------------------------------------------------------- Cost % Minimum charge Norwich & Peterborough 1.00* pounds 17.00 Skipton 1.00* pounds 25.00 Barclays Bank 1.65 pounds 28.00 National Westminster 1.65* pounds 25.00 Sharelink 1.50** pounds 20.00 Lloyds Bank 1.50 pounds 18.50 Midland Bank 1.50 pounds 20.00 TSB 1.50 pounds 20.00 ----------------------------------------------------------------- * On first pounds 5,000 ** On first pounds 2,500 -----------------------------------------------------------------

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