Question
Why does such and unusual and (on the face of it "odd") term like "Bed and Isa" exist at all?. I remember the term "Bed and Breakfast" used to exist in relation to investments but have forgotten exactlt what it referred to. Somebody somewhere must have decided that the old "pun" should be kept going in a new form that no longer made any sense to the man in the street.
Why was this so and why does "Bed and ISA "have to be distinguished from a mere and "common or garden " switch : it implies there is a difference? Are there any Government inspired differences or insistences? I remember these being referred to but cannot remember what they were exactly.Answer
In investment terms, 'bed and breakfast' refers to the practice of selling an investment (e.g. shares or units in a fund) one day and buying back the same investment the following day - the reason being to realise capital gains that can be offset against an individual's annual capital gains tax allowance (currently £10.600).
However, Gordon Brown (then Chancellor) scuppered this practice in 1998 by introducing a rule that investors would have to wait for 30 days before buying back the investment to effectively realise gains. Otherwise, the original purchase price of the investment is deemed to be the price at which you subsequently buy it back (the original purchase will subsequently apply when you sell the investment and don't repurchase within 30 days).
This leaves three practical options if you want to optimise your use of the annual capital gains allowance by stripping out gains from your portfolio each year (I refer to shares below, but it could equally apply to other investments subject to capital gains tax)..
1. Sell shares and wait at least 30 days before repurchasing the same shares.
2. Sell shares and re-invest the proceeds (straight away) in other shares.
3. Sell shares and buy them back (straight away) within an ISA.
Re-purchasing shares within an ISA is not caught by the 30 day rule because an ISA is technically treated as a different investment, even though you might buy back the same shares you've just sold.
The reason for referring to 'bed and ISA' is to distinguish this from 'bed and breakfast', because the process does still allow you to realise gains when selling shares and repurchasing them within 30 days (plus everyone in financial services seems to like jargon!).
Why does such and unusual and (on the face of it "odd") term like "Bed and Isa" exist at all?. I remember the term "Bed and Breakfast" used to exist in relation to investments but have forgotten exactlt what it referred to. Somebody somewhere must have decided that the old "pun" should be kept going in a new form that no longer made any sense to the man in the street.
Why was this so and why does "Bed and ISA "have to be distinguished from a mere and "common or garden " switch : it implies there is a difference? Are there any Government inspired differences or insistences? I remember these being referred to but cannot remember what they were exactly.Answer
In investment terms, 'bed and breakfast' refers to the practice of selling an investment (e.g. shares or units in a fund) one day and buying back the same investment the following day - the reason being to realise capital gains that can be offset against an individual's annual capital gains tax allowance (currently £10.600).
However, Gordon Brown (then Chancellor) scuppered this practice in 1998 by introducing a rule that investors would have to wait for 30 days before buying back the investment to effectively realise gains. Otherwise, the original purchase price of the investment is deemed to be the price at which you subsequently buy it back (the original purchase will subsequently apply when you sell the investment and don't repurchase within 30 days).
This leaves three practical options if you want to optimise your use of the annual capital gains allowance by stripping out gains from your portfolio each year (I refer to shares below, but it could equally apply to other investments subject to capital gains tax)..
1. Sell shares and wait at least 30 days before repurchasing the same shares.
2. Sell shares and re-invest the proceeds (straight away) in other shares.
3. Sell shares and buy them back (straight away) within an ISA.
Re-purchasing shares within an ISA is not caught by the 30 day rule because an ISA is technically treated as a different investment, even though you might buy back the same shares you've just sold.
The reason for referring to 'bed and ISA' is to distinguish this from 'bed and breakfast', because the process does still allow you to realise gains when selling shares and repurchasing them within 30 days (plus everyone in financial services seems to like jargon!).
Read this Q and A at http://www.candidmoney.com/questions/question486.aspx
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