88V8 wrote:This morning I sold all my Rio and immediately bought BHP.
And I sold all my Shell and immediately bought BP.
HYPers don't like to sell, but where there is a credible equivalent In a sector, I view this as selling without selling.
Of course, they're not an exact equivalent, the yields differ for a start. But I aim to buy back after the 30 days idle period, so the purpose of this switch is to keep me in the sector price movement.
...
OH is about to reverse the process. Normally, she holds BP while I hold Shell, now she's going to switch.
Like JohnB, I don't see the point of
both switching back 31 (or more) days later
and OH doing the opposite of you, though one might want to do one for part of the exercise and the other for the rest. The aim of the exercise is to realise the capital gains required to use up one's CGT allowance with minimal effect on the holdings. If one has an OH (and the holdings one cares about are the combined holdings), then selling share A and buying share B while OH sells share B and buys share A (each choosing the size of their sale to realise their desired capital gain, and the size of their purchase to be the size of the other's sale) does the job perfectly - any switching back just adds extra trading costs for no further benefit. It's only if one doesn't have an OH (or does have one but for some reason one specifically cares about what's in one's own holdings) that switching back might be useful...
A few other points about that 'you switch from A to B, OH switches from B to A' technique, also known as (a form of) 'bed-and-spousing':
* Like all other forms of selling for CGT savings, it can equally well be done to reduce net gains above the CGT allowance down to or towards it by realising losses, as to increase net gains below the allowance up to or towards it by realising gains. One doesn't have a choice about which of those to do, of course - one is appropriate and the other not, depending on what gains and losses one has already been forced to realise - but it's worth saying that the technique tends to be rather more cost-effective when used to reduce net gains than when used to increase them. And of course, it's also more cost-effective if it kills two birds with one stone - i.e. achieves some other aim(s) in the process, such as raising cash one wouldn't otherwise have available for subscribing to one's ISA and subscribing it between the sale and the purchase, or making a change one desires to make to one's HYP. (More on both of these points towards the end of this post.)
* There's no real need for shares A and B to be from the same sector - they can be any two shares you like, because whatever they are, the combined holdings are unchanged apart from the combined cash being down by the trading costs.
* In its pure form, there
is however a need for you and OH to raise roughly equal amounts with the sales, so that each of you has enough cash to buy an equivalent holding of the other's sold share, possibly using some spare dividends or other cash in the account to make a small adjustment. And that's not necessarily going to be easy, both because the two of you might want to realise very different capital gains (e.g. because one has already realised a significant gain during the year through a takeover and the other hasn't), or because the ranges of unrealised capital gains available reasonably cost-effectively from their holdings differ markedly (see the rest of this post for why that might affect the sale amounts). If necessary, however, each can make a sale of the amount that suits them, with the one who wants the larger sale treating it as two sales, one for an amount that matches their spouse's sale, and the other for the rest (but obviously actually done as just one sale to save a commission). Each then makes a buy with the smaller amount as above, leaving the one who wanted the larger sale with the 'remainder' cash, which they deal with by a non-bed-and-spousing technique such as bed-and-ISAing, by achieving some other aim such as rebalancing the portfolio a bit by buying a different share, or if need be (and at the cost of extra risk of the price having moved substantially) by waiting until 31 or more days later to repurchase with it. So in that last case, one does use both the bed-and-spousing technique and waiting for 31 or more days to buy back - but only one of the two on any particular part of the sale proceeds.
* The trading costs typically have a much bigger effect than you might imagine from the apparently small 0.5% rate of stamp duty, because (a) it's 0.5% of the net sale proceeds, taken when you reinvest them; (b) the gain you're realising is less than the proceeds of the sale, especially if the holding you're selling has only risen by a modest percentage; (c) the CGT potentially saved is typically quite a lot less than the gain you're realising; (d) the CGT saving is only in the future and only a potential saving, not a certain one. To explain the last: OH ends up with an equivalent holding to your original holding of share A, except that it's at a higher base cost than yours was, and correspondingly in reverse for share B. So if at some point in the future share A is taken over or you decide that it really should be tinkered away from your joint holdings, the gain on it will be less than it would have been if you hadn't bed-and-spoused - and that's when the CGT saving potentially happens. It might never happen at all for at least three reasons: Firstly, you might continue holding the shares until you die - CGT forgets about all gains that are still unrealised at the point of death, passing the job of taxing all capital (whether base cost or unrealised gains) over to Inheritance Tax. Secondly, the gain might end up being realised, but fall within your CGT allowance that year. Thirdly, CGT might be abolished (I admit that this one seems pretty unlikely!).
To give an example (with numbers chosen for roundness rather than anything else): suppose you're thinking of realising a gain of £5k to fill up your CGT allowance. You look through your portfolio and find a holding that you bought for £25k and whose current value is £30k (so standing on a 20% capital gain). That looks suitable, but let's look at the costs, the main one of which is the 0.5% stamp duty when the £30k is reinvested: that's £150. Broker commission might add £20 to that (one £10 commission for the sale and another for the reinvestment purchase), and while bid/offer spread on a HYP share will be a very small percentage, it's not totally negligible - 0.1% would be a reasonable ballpark figure, which comes to £30 and produces about £200 costs in total (or £202 if one takes the two PTM levies into account, but that's negligible because it's smaller than the uncertainty in the bid/offer spread). The potential future CGT saving depends on what the CGT rate is at the point when the future sale happens, which is
very unpredictable, since whether it happens at all, when it happens if it does and what the government in charge of the tax rates will be at the time are all highly unpredictable. But assuming it's 20% as at present, the potential future CGT saving is £1k.
So is it worth spending costs of £200 now for that potential future CGT saving? If it were a definite current saving, clearly the answer would be yes. If it were a definite future saving, the answer would basically depend on whether you could grow the £200 to more than £1k before it happened, so on the answers to "how long in the future?" and "what long-term return rate do I want to assume I could achieve on the £200?". But for instance, if one wants to assume one can achieve 8% long-term, the answer is that it's a good idea if the saving is no more than 20 years in the future. But with it only being a potential future saving, one also has to factor in the chance of it not happening at all, and that has to take all sorts of personal factors into account, such as one's age and state of health (which clearly affect the likelihood of death preventing it from happening) and how much one tinkers (which clearly affects the likelihood of one deciding to realise the future gain even when it isn't being forced by takeover). So anyone in the situation of having to consider CGT (by no means all HYPers are!) will have to assess it for themselves. FWIW, for my personal circumstances and preferences about how I run my HYP, I would find it a decidedly marginal decision and I'm uncertain what decision I would come to.
The percentage gain on the share being sold matters quite a bit for that. For instance, if it is a holding bought for £10k and now worth £15k, having risen 50% (or the appropriate top slice out of a bigger holding that has risen 50%, such as a third of a holding bought for £30k and now worth £45k), then a similar calculation says that the cost of the potential future £1k CGT saving reduces quite a lot to about £75 stamp duty + £20 commissions + £15 bid/offer spread = £110. Something bought for £5k and currently worth £10k (a rise of 100%) would be even better, with costs of about £50 stamp duty + £20 commissions + £10 bid/offer spread = £80. And in the opposite direction, something bought for £50k and currently worth £55k (a rise of 10%) considerably worse - the costs are about £275 stamp duty + £20 commissions + £55 bid/offer spread = £350.
So basically, when doing this, one should think of using the holdings on which one has the highest percentage gains first, and not bother considering anything with a percentage gain under a threshold, which will depend on one's personal circumstances and preferences. For me, the above indicates that my own threshold is probably somewhere in the region of 20% - but it's not actually something I've had to consider for a few years, and at least one important aspect of my personal circumstances has changed quite markedly in the last couple of years. The reason that I've not had to consider it is that I've been fortunate enough to realise very substantial gains in my non-HYP investments in each recent year, partly as a result of takeovers and partly because my largest smallcap holding has repeatedly risen to my too-many-eggs-in-that-basket point, prompting me to top-slice it (which is a somewhat tricky procedure when one is making large sales of a smallcap, but that's too much of an off-topic detour!). As a result, my CGT problem has not been to realise gains to use up my CGT allowance, but to realise losses to bring my net gains down to the CGT allowance, or at least closer to it. The economics of that are quite a lot better, both because (unlike the gain) the loss can be greater than the sale proceeds and because the CGT saving is a definite near-future one, due just under 10 months from now. I didn't manage to reduce my net gains all the way to the CGT allowance for the 2018/2019 tax year, but did take it a very substantial part of the way with decisions to sell off other smallcaps that had not done so well and were not showing signs of improvement in my view, and yesterday I reduced them a useful amount further by biting the bullet and tinkering Sainsbury out of my HYP. The holding was sitting on a ~36% loss, making its sale value ~64% of what I paid for it and the loss ~36% of what I paid for it, so the loss was about 36/64 = 56% of the sale proceeds and the 20% CGT saving on that is about 11% of the sale proceeds. Stamp duty when I reinvest it (probably on Monday) will be about 0.5% of the sale proceeds, and other costs will add a bit to that, but the total will certainly be under 1% of the sale proceeds. So the costs I'm putting into the tinkering will be returned over 10 times in CGT savings at the end of January next year - not a bad return!
I should also add that Sainsbury was also a share whose place in my HYP wasn't secure anyway - it's definitely gone downhill as a HYP candidate since I bought it in 2013. And it was in one of the two remaining sectors I was more than doubled-up in (*), and unlike the other one (property/REITs), it isn't one I'm all that keen on even being doubled-up in. So basically, the CGT reduction opportunity wasn't the only reason for tinkering Sainsbury out of my HYP - it's just the final rather substantial straw that pushed me into doing something I'd dithered over before!
(*) My other two food retailers/Supermarkets are Morrison and Marks & Spencer (which isn't enough of a food retailer to make the sector properly tripled-up, but it is enough to make it IMHO rather more than doubled-up).
Gengulphus