# Key Post: Bed and Breakfast



## Marion (12 Dec 2001)

Hi all

Quick question, can anyone explain the term Bed and Breakfast when coming to selling shares over two tax years.

Thanks

Jester


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## tedd (12 Dec 2001)

*Re: Bed and Breakfast*

Hi Jester,

Thanks for bringing this up .... I would be interested in hearing what people have to say.

Bed and breakfast usually means selling shares and then buying them back. I think it is usually done within the same tax year, and usually on the same day. It is essentially a way to crystallise a loss or a gain in your share values for the purposes of benefitting from your annual capital gains allowance. It is usually done because you can't carry forward an unused capital gain allowance to the following tax year (I think). Some stockbrokers offer a special fee to execute a B&B order which is somewhat cheaper than if you sell and buy back at a later time point. You also pay stamp duty. I'm not sure about whether there is some other sort of B&B which involves two tax years, maybe someone else would know?

UDS (if you're out there!), in relation to the parallel discussion about tax avoidance/evasion, where does B&B fit in? Could the Revenue argue that the transaction is made solely for the purposes of tax avoidance and subsequently deem that it was invalid?  

Also, since lots of people have crystallised losses on shares this year, what is the role of B&B? I think I read somewhere that you must offset all losses before you can claim the allowance. Is this true? 

regards,
tedd

PS Just discovered a related discussion here


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## CM (12 Dec 2001)

*B&B*

That's a fair summary.

B&B is a perfectly legitimate tax <!--EZCODE ITALIC START-->_ avoidance_<!--EZCODE ITALIC END--> measure and is usually done in order to use up an otherwise unused annual CGT allowance and to "reprice" shares upwards in anticipation of reducing the eventual CGT liability on future disposal. The sale & "buy-back" halves of the B&B transaction are executed on the same day. There is no concept of a B&B deal involving more than one tax year. B&B deals were discussed in detail on the AAM archives but unfortunately the server seems to be down at the moment so I can't post any links.

The charges applicable are 

- Broker fee - c. £25-£30 last time I executed a B&B
- 1% stamp duty on share "buy-back"


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## CM (12 Dec 2001)

*AAM archive link*

 is the link that I was looking for in the AAM archives.


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## Grundy (12 Dec 2001)

*B&B*

(a) Doesn't work for losses. If you buy shares back within 4 weeks of a realized loss then that loss can only be set against future gains on the repurchased shares.

(b)  This is hardly worth the candle.  The maximum upside is £200 (20% of £1,000) and the costs are £30 + 1% stamp duty.  So the break-even point is about £17,000 worth of shares.  If you need to B&B any more than this you are out of pocket.


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## CM (12 Dec 2001)

*CGT*

Yeah - I think B&Bs were easier to justify when CGT was 40%. Now that it's 20% the benefits are marginal or non existent.


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## Grundy (12 Dec 2001)

*And Allowances were £2,000 - £800 savings in all*

:rolleyes


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## CM (12 Dec 2001)

*History lesson*

Do you mean when the individual annual CGT allowance was £2000 (was it ever?) or when the individual £1000 CGT allowance could be transferred between spouses?


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## Grundy (12 Dec 2001)

*Thanks for history lesson, CM, and the correction*


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## tedd (12 Dec 2001)

*Re: Losses*

Grundy,

If I understand your point correctly, you are saying that a loss can only be set against a future gain on the same shares. I thought a loss could be set against ANY future gain, whether from shares, sale of an asset, whatever and that it could be carried forward indefinitely but must be "used up" before you claim the annual allowance in any given year. 

I am a bit confused about the whole 17,000 aspect you mention, could you explain it a bit more simply for me?

thanks,
tedd


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## Grundy (12 Dec 2001)

*tedd's queries*

My understanding is that if you reacquire the same share within 4 weeks then the loss (arising from the B&B) can only in future be set against gains on that particular share.  It was to prevent large institutions B&Bing losses on those shares that were in loss but not B&Bing those that were in gain.  

Individuals B&Bing to avail of the Personal Allowance is far less threatening and is clearly tolerated by the Revenue.

<!--EZCODE BOLD START-->* £17,000?*<!--EZCODE BOLD END-->

The way I see it, the most you stand to gain is £200 i.e. 20% of £1,000 allowance.  Now if it costs £30 to process the B&B and £170 (1%) Stamp Duty to reacquire £17,000 worth of shares.  That seems to have blown the £200 you were putting all this effort into chasing in the first place.:eek


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## CM (12 Dec 2001)

*Offsetting losses*

<!--EZCODE BOLD START-->* If I understand your point correctly, you are saying that a loss can only be set against a future gain on the same shares.*<!--EZCODE BOLD END-->

In general it's true that a capital loss can be offset against a capital gain regardless of the source of the relevant loss/gain. However I guess in the case of a B&B (due to the four week rule that Grundy mentions) any loss realised during the B&B sale can only be offset against any gain subsequently made (at some point in the future) on the shares "bought back". I seem to remember this being mentioned at some point in the past on AAM and it's a subtle point that is often overlooked (as I did above!) when summarising the mechanics of B&Bs.

I'll leave the explanation of the £17,000 figure to Grundy!


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## tedd (12 Dec 2001)

*Re: Offsetting losses*

Sorry to be thick, Grundy, but I'm still confused.

Let's say I bought 200 shares at 500p (cost IRP 1000.00).
Then, to avail of B&B, I sell 200 shares now at 1000p (value IRP 2000.00).  Capital gain IRP 1000.00, tax due IRP 200.00.

Repurchase shares at same price IRP 2000.00 plus stamp duty 1% (IRP 20.00) and transaction cost IRP 30.00. 

I thought this way I have a capital gain of IRP 1000.00, and avoid tax of IRP 200.00 for a cost of IRP 50.00 (ie net gain IRP 150.00). 

Am I missing something?

tedd


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## Grundy (13 Dec 2001)

*Why I never became a teacher*

<!--EZCODE BOLD START-->* tedd*<!--EZCODE BOLD END-->  your example is exactly as I see it and you would make a £150 profit on the effort in that situation.  But that was because your share was standing on a whopping 100% gain and therefore you could afford to take a cheap Bed & Breakfast.  If the percentage gain was much less you would need to go for a much dearer Bed & Breakfast hence eroding the £200 benefit.  The point at which it is neutral is £17,000.:rolleyes


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## tedd (13 Dec 2001)

*Re: Why I never became a teacher*

Ah,  now I understand Grundy. The cost of the stamp duty at 1% depends on the share price, I wasn't thinking on a sufficiently grand scale.
regards,
tedd

ps not "would" Grundy, "did"   !


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## Jester (14 Dec 2001)

*Good Lesson for the day*

Well folks, got to hand it to you lot there.  Between you all you seem to have it well covered.  Where else would you get such impartial, honest thorough advice/explaination.

Thanks again, sorry I ant use the Emoticons, 

;-)

Jester


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