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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Bed and breakfasting: conditions to be satisfied

You may accept that a bed and breakfast transaction will give rise to a disposal (and reacquisition) of an asset where the owner of the asset genuinely relinquishes control of the asset, so that

  • the parties to the transaction are both genuinely exposed to a movement in the price of the asset between sale and repurchase; and
  • the transactions take place at arm’s length (or market value).

Beneficial ownership

In order for any bed and breakfast transaction to be effective, there must be a genuine transfer of beneficial ownership of the asset. Further advice on beneficial ownership is given at CG10720. If there is no transfer of beneficial ownership, there can be no disposal of the asset for capital gains purposes.

You should not accept that there is any transfer of beneficial ownership if the repurchase of the asset is agreed at the same time as the sale. So for example a sale and repurchase under a single agreement will not qualify as a disposal for capital gains purposes. In bed and breakfast deals the purchaser will often know of the seller’s intention to reacquire the asset. However that is not sufficient to challenge the transactions. To argue that there was no disposal you would need to show that an unconditional agreement to repurchase the asset was made at the time of the sale.

If the owner of the asset relinquishes control of the asset, both parties to the transactions will be exposed to movements in the price of the asset in the period between the sale and the repurchase. The purchaser of the asset will want to take account of this exposure when agreeing terms. If in any case the sale and repurchase prices are very close, or identical, this could suggest that the purchaser had not been exposed to any real commercial risk. This might, in turn, suggest that the original owner never in fact lost beneficial ownership of the asset.

Repos

Note that combined sale and repurchase contracts for shares and securities are a very common commercial transaction, often referred to simply as “repos”. These are not treated as involving any disposal of the asset for capital gains purposes. For companies, any profit or loss on the transaction is taxed as the profit or loss on a deemed loan relationship. See CTA09/PT6/CH10 & guidance at CFM46000+.

It will be unusual for a person who is chargeable to income tax to be a party to a repo. For 2013-14 onwards, the return from such an arrangement is taxed under the income tax rules on disguised interest. See TCGA92/S263A & ITTOIA05/PT4/CH2A & guidance at SAIM2700+.

Sale and repurchase prices

The considerations above will also apply to the actual prices at which the sale and repurchase took place. In a genuine transaction these would be expected to reflect the market value of the asset concerned. Sale and repurchase at prices significantly different from market value might again suggest that the original owner never lost beneficial ownership of the asset.

Bed and breakfasting to establish a tax loss

A Targeted Anti-Avoidance Rule was introduced to stop the creation of artificial losses by companies in FA06 and extended to capital gains tax in FA07. See TCGA92/S16A and guidance at CG40240+ (companies) and CG15835 (persons chargeable to CGT). This rule will apply where a bed and breakfast transaction is undertaken with a main purpose of creating a tax loss. The effect is that any loss is not allowable for tax.