Tristan Noyes looks at the capital gains tax annual exemption and considers a popular planning technique.
The UK’s tax rules generally give individuals an annual exemption from capital gains tax (CGT).
The exemption is £3,000 (for 2025/26), but it has been more generous in previous years (e.g., it was £12,300 in 2022/23). It allows individuals to make capital gains up to that limit with no CGT (for example) on company shares or a rental property.
What’s it worth?
With CGT recently increased to 24% for higher rate taxpayers, the annual exemption could be worth up to £1,440 per year for a couple.
However, the allowance only applies to gains realised in the tax year. Suppose that you held some shares for 10 years then sold them, realising a gain of £50,000; you can only offset £3,000 of exemption, leaving £47,000 taxable, not 10 years’ worth of allowances.
Use it or lose it!
If you do not use the annual exemption, it is lost, so it would make sense to sell some assets each year to generate £3k of gains. But what if you do not want to sell any assets?
Historically, some people used a technique called ‘bed and breakfasting’; this broadly involved selling some shares on one day and then buying them back the next day. This allowed the owner to realise a capital gain but without losing the investment overall.
Example: Planning that no longer works
Roy held shares in Tesco Plc, which he bought for £15,000. The shares grew in value to £18,000. He wanted to use his allowance but did not want to sell the shares. He could sell them on Monday and buy them back on Tuesday, generating a capital gain of £3,000, which was tax-free due to the annual exemption.
He continued to hold the shares and his base cost became £18,000.
Unfortunately, the tax rules were changed in 1998, and this strategy no longer works; if the shares are repurchased within 30 days, HMRC will ‘match’ the sale with the later purchase.
So, in Roy’s case, he would be treated as if the sale on Monday for £18,000 is matched with the purchase on Tuesday for £18,000. He does not realise any capital gains, and his shares still have the original base cost of £15,000.
Roy could have waited 31 days before he bought the shares back, but he did not want to risk missing out on a big price increase.
All is not lost…
Despite these rules, there are still some strategies that can utilise bed and breakfasting to optimise your CGT position. If Roy wants to bank his £3k gain to use the allowance, he could:
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sell his Tesco shares and ask his wife to buy the same number of shares on the same day (‘bed and spouse’); or
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sell his Tesco shares and buy the same number of shares back in his stocks and shares ISA (‘bed and ISA’); or
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sell his Tesco shares and buy the same number of shares in his pension (‘bed and SIPP’).
In all these cases, he could reverse the transaction after 30 days without breaching the matching rules if he wanted the shares back in his own hands, with any movement in price captured by his wife, ISA or SIPP.
Beware the bedbugs!
Don’t forget - there may be dealing costs on buying and selling shares and a bid-offer spread (i.e., a difference between the buying price and the selling price), so factor these into working out the benefit.
You could also use these techniques to bank a capital loss if you wanted to use it against other capital gains – but watch out for the anti-avoidance rules on using capital losses.
Practical tip
At the end of each tax year, it’s worth considering whether you could use these techniques to realise a gain while retaining exposure to investments. You could combine it with contributions to an ISA to utilise those allowances, too, or to a pension to obtain income tax relief.
