BED & BREAKFAST - CAPITAL GAINS

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30 July 2019

1 Introduction

· This article explains the concept of “Bed and Breakfast Rules” for Capital Gains Tax purposes.

2 What is the Practice of Bed and Breakfast?

· Until 17 March 1998, individuals could sell shares and buy them back the next day to minimize the Capital Gains Tax liability.

· Positions are closed out at the end of the year and immediately reopened on the first day of the new financial year in order to take advantage of the annual exemption.

· By doing this, the individual can effectively reset the base cost of the shares at a higher value so that future gains would be based on the new higher price, thereby limiting the amount of gain.

3 What is the 30-Day Rule?

· The 30-day rule, from 17 March 1998, brought an end to this practice.

· This means that 30 days must lapse between the sale and repurchase in order to have the same effect.

· If not, the individual is treated as not having made a sale and will be subject to Capital Gains Tax at the original base cost.

· The 30-day timeline is risky as the price may have significantly changed between sale and purchase, thereby preventing bed and breakfasting for tax advantages.

4 Effect of 30-Day Rule

· To counter the process this rule applies a CGT calculation to the share transactions carried out in this 30-day window and then retain the original base price rather than reset it.

· This is done by a process of matching the shares sold to the new identical shares bought in this window and then, after matching, apply the original purchase price to any subsequent resale at a later date.

· Click here to view example