Legally Avoiding Capital Gains Tax in Ireland – Bed & Breakfast Sales Strategy

  • By: Walter Dunphy ACCA
  • Date: October 3, 2022
  • Time to read: 3 min.

If you are someone who is investing in Ireland you will be well used to hefty taxes on profits made on your stocks and crypto. The current Capital Gains Tax rate in Ireland is 33%, investors are also entitled to an annual exemption to offset profits of €1,270 every year.

In this blog post, we are going to take a look at a the Bed & Breakfast Strategy which is used to minimise your capital gains tax liabilities within the limits of the tax laws in Ireland.

What is the Bed & Breakfast Sales Strategy?

The Bed & Breakfast Sales Strategy is a method of using up your annual exemption of €1,270 every year which can be offset against profits. An investor will dispose of investments that are in a profitable position and repurchase them to utilise the tax exemption to its fullest extent.

By doing this you will increase the cost basis of your investment and pay less tax at the time of the ultimate disposal of the investment.

The annual exemption of €1,270 does not carry over on to the next tax year if it is not used. If you don’t use it you lose it, so it is in everyone’s best interest to make sure that it is used every year.

If you are a long term investor that is holding on to your stocks or crypto for a number of years without every realising any of your gains, you will be losing out on a tax saving of €419 (€1,270* 33%).

Refer to the example below to visualise how this works in practice.

Mistakes to Avoid

Here are some mistakes to avoid when executing this strategy:

Be careful if you are selling loss-making stocks: if you sell loss-making stocks and immediately repurchase them this triggers a wash sale. The tax authorities do not like when investors sell loss-making stocks to reduce taxes and immediately repurchase them. So they created a rule that ring-fences those losses so they cannot be offset against your other gains.

If you are selling loss-making stocks you will have to wait 4 weeks to repurchase them to avoid being caught out by this wash sale rule. The downside of this is that the market may move considerably either for or against you in those 4 weeks.

You can learn more about the wash sale rules in the following blog post.

Have you already used up your exemption? The annual exemption of €1,270 is not for each individual investment, you just get one exemption to use across all investments in stocks, crypto and property. If you have already realised profits on any of these investments during the tax year then you may have already utilised some or all of the €1,270 exemption. Therefore, the Bed and Breakfast Sales Strategy would not be applicable to you.

Example

In this example for simplicity, an investor has purchased 10 Apples shares at a price of €110 in January of 2021 at a total cost of €1,100. This investor has no other investments in stocks, crypto etc.

The investor has a high conviction that the Apple share price will rise considerably over the coming years and therefore intends to hold on to them for at least 5 years.

At the end of the first year, the price of Apple had increased to €170, now the investor is in a profit of €600 that has not been realised.

Now the investor decides to use the Bed & Breakfast Sales strategy to utilise their annual exemption of €1,270, they sell all 10 Apple shares and buy them back.

As the €600 is below the exemption limit they pay no tax on this now realised profit.

Going into 2022 the cost basis for their 10 Apple shares is now €1,700 (up from €1,100).

They can continue to repeat this process every year for the 5 years they plan on holding the Apple shares.

Let’s say in 5 years the Apple share price is €500, the 10 shares would be now worth €5,000. If they had not utilised the annual exemption every year along the way by executing the Bed & Breakfast Sales Strategy they would have a much higher realised profit at the end of the 5 years of €3,900 (€5,000-€1,100). Therefore the capital gains tax paid would be much higher. They essentially have wasted 4 years of annual exemptions.

Using the B&B strategy will increase your cost basis each year and reduce your final CGT bill.

This blog post is for informational and educational purposes only and should not be construed as financial advice.

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