What Is a Bed and Breakfast Deal?
A bed and breakfast deal was a practice in the United Kingdom whereby a security holder sold it at the end of the day and bought it back one day later. Its purpose was to create a disposal event and a loss that would benefit the holder regarding capital gains.
This practice became defunct when legislation was passed in 1998 making it impossible to make an arrangement to sell a security and repurchase it less than 30 days later to claim a loss for a capital gains tax exemption.
This practice is also called "bed and breakfasting" or "bed and breakfasting with shares."
Key Takeaways
- Bed and breakfasting with shares was an investing strategy in the United Kingdom where an investor sold a security at the end of the day and repurchased it the next day.
- The bed and breakfast deal allowed investors to claim a loss as a capital gains tax exemption while still owning the asset.
- The 30-Day Rule of 1998 banned the practice of traditional "bed and breakfasting," forcing investors to wait 30 days before repurchasing the asset to claim a capital gains tax exemption.
- There are several strategies that allow investors to replace the bed and breakfast deal without violating the 30-Day Rule.
How a Bed and Breakfast Deal Works
Traders carry out bed and breakfast deals to maintain an investment portfolio while minimizing UKcapital gains taxes. Traders used to 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. Because this practice intentionally sought to reduce or bypass capital gains taxes, tax authorities passed a rule preventing investors from arranging bed and breakfast deals.
Because of this rule, traditional "bed and breakfasting" is no longer possible. You must nowwait 30 days to buy an asset back and claim a capital gains tax exclusion. However, this does not always appeal to those who wish to stay in the market because it means the asset must be entirely "disposed" of, with the previous owner having no claim on or to it.
For a transaction to be considered a bed and breakfast deal, the purchased asset must be of the same class, acquired by the same person in the same capacity, and be acquired within 30 days of disposal (the sale).
Alternatives to Bed and Breakfast Deals
There is a way for you to sell an asset and buy it back later while maintaining a position in the market using a contract for differences (CFD). A contract for differences lets you trade the asset's price movement while not holding it. You can use this on stock indices, exchange-traded funds (ETFs), and commodity futures.
Using a CFD strategy, you could sell your asset and wait the mandatory 30 days before repurchasing it. Then, you purchase a CFD for the asset from a CFD broker. After 30 days, you close their CFD position, repurchase the investment, and claim a capital gains tax exemption if warranted. This strategy lets you stay in the market and participate in the stock's price movement without violating the 30-Day Rule.
Another alternative is to use the bed and spouse strategy, where you sell the asset and your spouse or partner immediately purchases it. Then, they transfer it to you, and you can claim the tax exemption if there was a loss.
Lastly, if you have an individual saving account (ISA), you can use the bed and ISA strategy to sell your asset and purchase it with your retirement account.
CFDs are an advanced strategy that can lead investors to large losses in volatile markets, and the industry itself is not highly regulated; because of this, CFD trading is not allowed in the United States.
Example of a Bed and Breakfast Deal
Let's assume you bought10,000 shares of XYZGroup sixmonths ago at £3.50, and the share price of XYZGroup is currently £3.00. You contact your regular stockbroker and sell the shares at £3.00, thereby actualizing a loss of £5,000 (ignoring broker commissions in this example).
In the past, you might have sold the shares, and claimed the loss as part of your annual exemption amount. The next day share price rose to £3.05, so you could justify repurchasing them. In this case, the £5,000 loss lowers the taxable amount of your income from capital gains, and you purchased the shares again for £0.45 per share less than you did six months ago.
Regulators would now consider this a bed and breakfast deal—you could still repurchase the shares, but because you didn't wait 30 days to do so you can't claim the tax exclusion on the loss.
What Is the 30-Day Rule for Shares?
The 30-day rule for shares prevents investors from selling a share and repurchasing it the next day to realize a loss and take advantage of capital gains tax exemption laws. The rule requires a 30-day window between buying and selling a share to claim the exemption.
How Do I Share My Bed and ISA?
A bed and ISA is where you sell an investment and repurchase it with your ISA funds.
How Does Bed and Spouse Work?
In the bed and spouse strategy, you sell an asset for a loss to take a capital gain exemption and have your spouse or partner repurchase it and transfer it to you.
The Bottom Line
Originally, "bed and breakfast deal" was used to refer to selling an asset one day and repurchasing it the next to take advantage of capital gains tax exemptions. It now refers to selling an asset and repurchasing it within 30 days to take advantage of tax exemptions.
Investors in the U.K. must wait 30 days before repurchasing an asset to claim capital gains tax exemptions to avoid the "bed and breakfast rule."
