Capitalising on ways to avoid tax: Christine Stopp looks at bed and breakfast and other methods for minimising your CGT liability

WE PAY pounds 8bn a year in tax unnecessarily, and small investors pay out pounds 5m of this in capital gains tax, according to the brokers organisation Ifap. But capital gains tax is easy to avoid if you plan properly.

Suppose you had inherited pounds 20,000 in February 1985 and had left it invested in a portfolio of shares that had grown in line with the FT-SE 100 Index. They would now be worth pounds 44,206. These, said Richard Larner of Norwich stockbrokers Waters Lunniss, are the sort of circumstances that lead to a potential CGT problem.

Though you would have made a gain of almost pounds 25,000 on the above portfolio, indexation relief would reduce the amount of CGT to pay. Inflation has raised prices by 50 per cent since February 1985, and this figure is used to enhance the original value of your inheritance, reducing the taxable gain. The acquisition cost will be taken as pounds 30,000, leaving a tax bill based on a gain of pounds 14,206 if selling your whole portfolio. It would amount to pounds 3,362.40 using the annual exemption.

Every taxpayer has an annual CGT exempt limit - pounds 5,800 for the current tax year. You have to pay tax only if gains for the year on all the assets you sell are above this figure. In this case, if the money is needed soon, Richard Larner would advise you to sell half the shares now and half after 5 April. In this way you would be using the exempt allowance from two consecutive tax years, and there would be much less tax to pay. If you wanted to hang on to your portfolio, you should sell a portion in order to realise the gain within your exempt limit and reinvest the money gradually into a tax-free personal equity plan.

If you have built up a big portfolio it is wise to sell shares, realising a gain to the maximum of your exempt limit, and buy them back again on the following day. You have then established a higher acquisition cost on which future tax assessments will be based. The arrangement is known as 'bed and breakfasting'. Sales of assets must be shown on your tax return if their total value was more than pounds 11,600 and the total chargeable gain was over pounds 5,800.

If you make losses on investments during the year they can be offset against gains. A net loss can be carried forward to the following year. A CGT bill for this year does not have to be paid until next year.

People who have been saving steadily for a number of years might find themselves in this position. It is unlikely that privatisation shareholders will have yet run into problems, even if they subscribed to several issues, as the allocations on each were so small. A married couple may have pounds 25,000 between them in privatisation issues, but they will also have two exempt allowances to swallow up gains.

You may have been saving and investing for some years without taking advice. If you think you have run up a CGT liability it is worth getting it properly checked by an accountant. In addition to indexation, the date of the purchase can affect the calculation, as can rights issues and dividends. Stockbrokers will sell shares for you, and can point out that you should be looking at your capital gains tax position, but cannot undertake to advise you unless they have completed a full 'fact find' on your affairs.

In order to sell your shares and buy them back again the next day, Waters Lunniss will charge 1.85 per cent commission on the sale for advisory clients, and 1.2 per cent or less for investors who simply want them to make the sale, without giving advice. On the repurchase there will be stamp duty of 0.5 per cent. There will also be a difference between the selling price and the buying price. This might give a cost of, say, pounds 30 on pounds 1,000 of shares. You should remember that you are 'at risk' overnight - that is, if there is a strong movement against you in the stock market between the sale and repurchase, you could make a loss.

Most stockbrokers charge commission on a sliding scale, with a lower percentage on larger deals. Bed and breakfasting with Barclays Stockbrokers carries a selling charge of 1.65 per cent on the first pounds 10,000, with a minimum of pounds 28. There is no commission on the repurchase, though stamp duty applies.

NatWest Stockbrokers charges 1.65 per cent up to the first pounds 5,000 of shares sold, and a fixed fee of pounds 25 plus stamp duty on the repurchase. This is for deals made through branches. Customers approaching them direct will be charged less, and special rates apply for NatWest gold card holders.

Sharelink, which offers a share- dealing service only, without advice, offers two arrangements for using CGT allowances. Investors can bed and breakfast sums of pounds 5,000 or more for a flat charge of pounds 50 (compared with the normal commission of pounds 112.50). For deals up to pounds 6,000, clients can sell and repurchase proceeds, with a pounds 20 minimum and a pounds 37.50 maximum for transactions within the PEP, which has no initial charges. Bed and breakfast orders must be with Sharelink by 31 March and PEP applications by 26 March.

----------------------------------------------------------------- CGT INDEXATION ALLOWANCE FOR ASSETS SOLD IN JANUARY ----------------------------------------------------------------- Month 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 Jan - 0.669 0.588 0.512 0.433 0.379 0.335 0.242 0.154 0.059 0.017 Feb - 0.662 0.581 0.500 0.427 0.374 0.330 0.233 0.147 0.053 0.012 Mar 0.736 0.659 0.576 0.486 0.426 0.371 0.325 0.228 0.136 0.049 0.009 Apr 0.702 0.636 0.556 0.455 0.412 0.355 0.303 0.206 0.102 0.036 Nil May 0.689 0.629 0.550 0.448 0.409 0.353 0.298 0.199 0.093 0.033 Nil June 0.685 0.625 0.546 0.445 0.410 0.353 0.294 0.195 0.088 0.028 Nil July 0.684 0.617 0.548 0.448 0.414 0.355 0.292 0.194 0.088 0.301 Nil Aug 0.684 0.610 0.533 0.444 0.410 0.351 0.278 0.191 0.077 0.028 Nil Sep 0.685 0.602 0.530 0.445 0.403 0.347 0.272 0.183 0.067 0.025 Nil Oct 0.676 0.597 0.521 0.443 0.401 0.340 0.259 0.174 0.058 0.021 Nil Nov 0.668 0.591 0.516 0.438 0.389 0.334 0.254 0.164 0.061 0.017 Nil Dec 0.671 0.587 0.517 0.436 0.384 0.335 0.250 0.161 0.062 0.016 Nil -----------------------------------------------------------------