CG13350 - Bed and breakfasting
Throughout this manual, all legislative references are to the Taxation of Chargeable Gains Act 1992 (“TCGA92”) unless otherwise stated.
The term bed and breakfasting covers 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 CG51500C.
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.
A bed and breakfast transaction gives rise to a disposal (and reacquisition) of an asset where the owner of the asset genuinely transfers beneficial ownership of the asset, see CG10702, so that
Both parties to the transaction are 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), see CG14480P.
If there is no transfer of beneficial ownership, there can be no disposal of the asset for capital gains purposes.
There is no 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.
Sale and repurchase at prices significantly different from market value might again suggest that the original owner never lost beneficial ownership of the asset.
Repos
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 Ch. 10 Pt. 6 CTA09 andCFM46000+.
It will be unusual for a person who is chargeable to income tax to be a party to a repo. The return from such an arrangement is taxed under the income tax rules on disguised interest,see s263A, Ch. 2A Pt. 4 ITTOIA05 andSAIM2700+.