What is the Bed and Breakfasting rule?
Traditionally Bed and Breakfasting (sale and repurchase) of shares referred to transactions where someone sells shares one day and brings them back the next morning. It allowed traders to take advantage of tax savings achieved by selling the security at the end of the financial year – however, the practise was since banned in 1998, meaning that traders must now wait 30 days before buying shares back.
How does a bed and ISA work?
Traders carry out bed and breakfast deals in order to maintain an investment portfolio while minimizing UK capital gains taxes. Traders will close out positions at the end of the year and immediately reopen them on the first day of the new financial year to take advantage of the annual tax exemption.
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. Under the new rules, there are a number of limitations, including the 30-day waiting period before the shares can be repurchased again.
Modifying the “Bed and Breakfasting” rule…
In some cases, it is possible to use a modified bed and breakfasting type of arrangement to sell an asset only to buy it back again a short time later.
You can use a Contract for Differences (CFD), which is a strategy that allows investors the opportunity to mimic a bed and breakfast deal without violating the 30-Day Rule that was put in place.
A gain could be created in order to use up 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.
However, proper consideration should be taken before undertaking such transactions to ensure that all tax aspects have been observed.
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.
We would always recommend that proper advice should always be taken before undertaking such transactions to ensure that all tax aspects have been considered.
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.
Still have questions?
Here at Farnell Clarke, we can help you with any questions or queries you may have – don’t hesitate to get in touch with us.
