Bed and Breakfasting - Contracts for Differences

The old practice known as "Bed and Breakfasting" is no longer possible in its simplest form (selling assets, usually quoted shares, and buying them back the next day in order to utilise the annual exemption).

You can wait 31 days before buying the shares back which is fine for Capital Gains Tax planning purposes, but this does not always appeal to those who wish to stay in the market. Contracts for difference can prove useful here.

Mimicking Bed and Breakfasting with CFDs

Let's assume you bought 10,000 shares of Hilton Group 6 months ago at £3.50 and the share price of Hilton Group is currently £3.00. You call up your regular stockbroker and sell the shares at £3.00 so actualizing a loss of £5,000 (for the sake of simplicity we are ignoring broker commissions in this example).

You then immediately call your CFD broker and buy 10,000 shares in Hilton Group. Remember that if you buy a CFD to reflect a long position of 10,000 Hilton Group shares, the broker will normally go and buy those shares in the market. That ties up the broker's capital and he will want to be compensated for that. So regardless of the initial margin you have paid to buy a CFD, you will pay a daily interest rate on the whole of the consideration.

Assuming an interest rate of 5% per annum; this corresponds to £4.11 a day which adds up to £127.40 for 31 days. After 31 days the Contracts for Difference position is sold at the prevailing Hilton Group share price. Immediately after the CFDs have been sold you call up your usual stockbroker and re-buy the 10,000 Hilton Group shares. The Bed & Breakfast deal is now completed.

CFDs have allowed you to stay in the market regardless of the market direction. If the share price rises within the 31 day period then profits will be built up on the CFD trade to offset re-buying the shares at a high price. But if the shares slump then the loss on the CFD trade is compensated by the cheaper price of the shares when they're bought through the stockbroker.

But I pay enough tax as it is and just wondered if there were any tricks. For example - can I take into account other shares that have lost me money? Can I share the gains over the period I have owned the shares? Can I put my head under the pillow and pretend nothing happened?

If you hold these shares outside of an ISA, and you haven't used your ISA allowance for the year, I suggest you sell £10000 worth and buy back immediately in an ISA. No need to wait 30 days as you have taken them outside of the CGT system. Some other ideas follow -:

1.) If you are married or have a partner you trust, buy shares in a joint account. Double CGT allowance that way. Not only this but if you have exhausted your CGT tax-free allowance and your spouse has not, you can always transfer shares between accounts before selling.

2.) As I did with GKP, took 20K profit...waited for 30 days to avoid Bed & Breakfast rule and brought back in. Remember CGT allowance is for each year. If you do not use it this year, it is gone. Cannot carry forward.

3.) Materialize your paper loss. For example, sell something which is good for long term but no news is expected in next 30 days. Take the loss and then buy back. Only issue if unexpected news come and you miss the boat.

I hold UK shares that are standing at gain. I want to continue to hold most of them until after 5 April, but would still like to use my CGT annual exemption to reduce the eventual tax charge by selling some. I know that I can't buy back within 30 days. Could I transfer the shares to my wife for her to sell and then immediately buy shares back in my name? This would use my wife’s annual exemption and I could still retain my interest in the shares.

Yes, you could do this. The transfer from you to your wife would be a 'nil gain/nil loss' disposal for capital gains tax purposes. Therefore there would be no CGT charge on the transfer. Your wife could sell the shares, crystallising the gain; but if she had her annual exemption available this could be offset. The share matching rules don't apply to shares that are bought back through spouses. In this case there is no disposal by you and therefore the repurchase of the shares by you would not be matched with the shares sold by your wife for CGT purposes. [credit to Lee Hadnum, Chartered Accountant and Chartered Tax Adviser]

Other ways which could be used in order to utilise the annual exemption:

  • 'Bed and Spousing' - for a couple (married or not), there is a very simple mechanism available. One partner sells the shares and the other one makes an equivalent purchase. (The repurchase must be made on the open market).
  • 'Bed and ISA' - sell the shares in order to realise your annual exemption and buy them back (again on the open market) through an ISA. It is, however, unlikely that you will be able to utilise the whole annual exemption in this way.
  • 'Bed and Trust' - sell the shares and buy them back on the open market through a trust.
  • 'Bed and Company' - sell the shares and buy them back on the open market through a company.

If following (iv) or (v) above, note that different tax regimes apply to trusts and companies.

Deferring your Capital Gains

Deferring your Capital Gains

One major advantage of CFDs is that you can offset any capital losses against tax. You can use this to your advantage to delay the realization of your capital gains which means that positions can be held into the new tax year.

How it works

For tax purposes, this technique can defer a share trading portfolio gain to the subsequent tax year, when the annual exemption or other losses may be available to offset it. Similarly a loss can be deferred if appropriate, or the holding period for taper relief purposes can be extended.

Example - Suppose 10,000 shares were originally purchased at 100p, and on 6 January 2007 stand at 200p. The investor wishes to lock in the economic gain, while deferring the chargeable gain until after 5 April 2007. The investor takes a short position via contract for differences over 10,000 shares at 200p.

On 6 April 2010 (assuming the tax year ends on 6 April), the share price is 250p. The investor sells the 10,000 shares, and closes the short position on his contract for differences over 10,000 shares. Ignoring brokerage charges and financing credits on the CFD short position, his gains for the tax year 2010/2011 are -:

Gain on shares 15,000
Loss on CFD (5,000)
Net chargeable gain 10,000

The £10,000 net chargeable gain is the same as if he had sold the shares in January 2010, except that it has now been realized in the 2010/11 tax year.