Bed and Breakfasting Rules for Shares

- Monday, June 17, 2019

Bed and Breakfasting Rules for Tax

For most people, the phrase “bed and breakfasting” calls to mind visions of small guest houses and morning meals that largely consist of fried food.

However, in tax terms bed and breakfasting means selling shares and almost immediately buying them back. This is called bed and breakfasting because the shares are sold at the end of one day (before going to bed) and repurchased the following day (when you get up for breakfast). The reason for doing this was that it allowed the owner to crystallise a capital gain or loss whilst still retaining ownership of the shares. Gains would be reduced by the annual tax-exempt amount for capital gains whilst losses could be offset against gains on other asset sales in the same tax year.

Because this was considered an abuse of the tax rules, additional rules were introduced in 1998. Where shares are repurchased soon after disposal, the sale is treated as not having happened for tax purposes. The normal waiting period for a sale to be effective is 30 days, with any repurchase of similar shares within that time period being taken into account.

Similar rules apply to loans to directors from limited companies. There are tax consequences for loans made to directors that are not repaid within 9 months of the company year end. If a loan is repaid, only for the money to be taken out again within 30 days, the loan is treated as not repaid for tax purposes. The exception to this rule is if the loan is cleared by paying taxable income to the director in question. Loans cleared by salary bonuses or payments of dividends are not caught by these rules.