Using CFDs To Replicate Bed & Breakfast CGT Schemes
June 2004
The UK Treasury eliminated the use of Bed & Breakfast style trading some years back. A B&B trade is where shares are sold one day to create either a profit or loss in order to utilise the maximum Capital Gains allowance. If the shares are sold for a loss then this can be offset against gains made on other investments, a loss is therefore actually worth some money. Bed & Breakfast deals were not illegal but the Treasury obviously thought that they were losing out on tax revenue so it closed the trick.
Slamming the door on these types of deals was easy because they made a ruling that shares bought or sold in a 30 day time period were deemed not to have been sold at all. However many investors have switched to using Contracts for Difference to re-open the door to these types of tax-management strategies.
Contracts for Difference (CFDs) are not that hard to understand, basically they offer the chance to trade shares using margin - £1,000 allows you to trade stock up to a value of £10,000. For an introduction to CFDs please see the LearnMoney guide - Click Here
How To Replicate B&B Style Trades
Part 1 - Selling the shares
- An investor bought 5,000 shares of ABC company 6 months ago at £3.00 and the price is presently £2.00
- The date is 4th April
- He calls up his regular stockbroker and sells the shares at £2.00 so crystallising a loss of £5,000 (commissions and other charges are excluded in this exercise)
Part 2 - Buying the CFDs
- The investor immediately calls his CFD broker and buys 5,000 shares in ABC
- Remember Stamp Duty is not levied on CFDs but because they are leveraged products they charge daily interest
- Daily interest would likely be charged at around 6% per annum which equates to £1.64 a day or £51 for 31 days
Part 3 - Selling the CFDs
- After 31+ days the CFD position is sold at the current ABC market price
Part 4 - Buying the shares
- Once the CFDs have been sold the investor then calls his regular stockbroker and re-purchases 5,000 shares
- The Bed & Breakfast deal is now completed
By using CFDs the investor has never been out of the market so it doesn't matter what the share price does. If it rockets within the 31 day period then profits will be built up on the CFD trade to offset re-buying the shares at a high price. But if the shares slump then the loss on the CFD trade is offset by the cheaper price of the shares when they're bought through the stockbroker (Part 4).
Summary
CFDs and other leveraged products often get a bad name due to their perceived riskiness. But people don't take the time to look behind the curtains and see that there are many other uses such as helping to reduce risk by hedging or as we've seen here sensible tax-management.
We may be sometime away from the fiscal end of the year but it's important for all investors as well as those who like to be as efficient as possible with their personal taxes to realise that products such as Contracts for Difference can be a major help.
See Also
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