What is the Bed and Breakfast deal?
Historically, the term bed and breakfasting (sale and repurchase) of shares referred to transactions where shares were sold and then bought back the next morning.
How does a Bed and Breakfast Deal work?
This used to have Capital Gains Tax (CGT) benefits by crystallising a gain or a loss but is no longer tax effective over such a short period.
The change to the rule occurred in 1998 when new legislation introduced special share-matching rules.
Under these rules, there are limitations including a 30-day waiting period before the shares can be repurchased again.
What is the Capital Gains Tax (CGT) 30-day matching rule?
The 30-day matching rule states that if an investment is sold and then repurchased within a 30-day period then any losses cannot be claimed for tax purposes.
The rules for this 30 day period are as follows:
- Any shares acquired on the same day as the disposal
- Any shares acquired within 30 days following disposal
- Any other shares on an average cost basis
Remember, these rules apply to losses rather than gains that have been made.
Can you prevent bed and breakfasting?
However, it is possible, under certain circumstances, to use a modified bed and breakfast type of arrangement to sell an asset only to buy it back again a short time later.
A gain could be created to use the annual exempt amount, or a non-resident may bed and breakfast their chargeable assets to establish a higher base cost before they enter the UK tax regime.
Proper advice should be taken before undertaking such transactions to ensure that all tax aspects have been considered.
Example of a Bed and Breakfast Deal
For example, for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset and the share matching rules must be met.
Below, is a scenario that could happen:
An investor buys shares with an asset of value £50,000. However, over a period of time, this value decreases to £40,000.
The investor wants to declare the capital losses for tax purposes whilst maintaining their shares.
The investor sells these shares but immediately buys them back at the same price, totalling a capital gain cost of £10,000.
Ultimately, the investor is able to minimise the amount of capital gains taxes that they must pay.
Bed and Breakfast with Contract for Differences
Another route that investors could potentially take is through a Contract for Differences.
(CFD) is an agreement between buyer and seller where the buyer pays the seller the difference between the current value of a financial instrument and the value of the asset during the initial contract.
This is an alternative option that can mimic the bed & breakfast deal where an investor could sell their securities and then purchase a CFD for the same price as the start of the initial 30-day waiting period.
Therefore, allowing a buyer to stay within the market and take advantage of any price changes within the 30-day rule.
This is unlikely to be available for all types of investment but is a strategy that can be utilised to jump around the bed and breakfasting rules.