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HMRC internal manual

Capital Gains Manual

Bed and breakfasting: general

The term bed and breakfasting was originally used to describe share transactions in which shares are sold one day and reacquired the following morning. It is now used more generally to cover arrangements in which a person sells an asset only to buy it back again a short time later. These instructions apply generally to the disposal and reacquisition of all types of asset but there is additional guidance on arrangements involving shares and securities at CG13370. Note that the definition of “securities” for these purposes includes any assets that normally dealt with without the need to identify the individual asset.

The purpose of a bed and breakfast deal is to create a disposal for Capital Gains purposes but to regain ownership of the asset. The disposal may be made to crystallise either a loss or a gain. A loss, could be set off against other gains. A gain could be created in order to use up the annual exempt amount (see CG18000+) or a non-resident may bed and breakfast their chargeable assets to establish a higher base cost before they enter the UK tax regime.

Tax cases have indicated that the Courts do not see straightforward arrangements of this sort as inherently objectionable. For example, Lord Templeman in the case of Ensign Tankers (Leasing) Ltd v Stokes (TL3306) contrasted the position of tax avoidance schemes with schemes

`whereby a taxpayer suffers a loss or incurs expenditure in fact as well as in appearance. A taxpayer who carries out a `bed and breakfast’ transaction by selling and repurchasing shares establishes a loss for Capital Gains Tax because he has actually suffered that loss at the date of the transaction. In `back to back’ transactions the taxpayer is entitled to any reduction in tax which Parliament has attached to each transaction.’

Therefore legislation has been introduced to prevent such transactions achieving their intended tax effect.