In the 1998 Budget Chancellor Gordon Brown abolished the stockmarket tax planning ploy known as 'Bed & Breakfast'. Stockmarket investors had used Bed & Breakfast deals to both limit and take advantage of their annual Capital Gains Tax (CGT) allowance.

The 1998 Budget closed the loophole so that now shares sold and re-purchased within a 30 day period are deemed not to have been sold at all with regards to the CGT obligations.

This in effect stopped Bed & Breakfast share dealing in its tracks, or did it?

Spread Betting & Bed & Breakfast Deals?

However, some industrious market participants have been using spread bets to try to replicate the old style Bed & Breakfast strategy, and it works like this;

• An Investor owns 1000 shares in Vodafone
• The shares were bought at £1.50 and they are now worth £1.00
• The investor still wants to hold the shares in his portfolio but at the same time take advantage of the paper loss against his CGT allowances
• The shares are sold at £1.00 (commissions and charges are left out for simplicity)
• He then enters the spread bet market to replicate (buy) his share holding in Vodafone
• However he has to make sure that the size of the spread bet duplicates the cash position
• 1000 shares x £1.50 = £1500 cost of original shareholding
• A 1p move equates to a £15 profit/loss
• Therefore in order to replicate the cash position the investor would buy Vodafone at £15 a point
• After 30+ days he would simultaneously sell the spread bet for either a profit or loss and then re-purchase the 1,000 cash shares
• It's a rough guess but perhaps factor in 1%-3% costs into this depending on the bid/offer of the share in question, Vodafone would be very cheap Wimpey Homes more expensive etc

Advantage & Disadvantage

Spread bets are tax free and this can either be an advantage or disadvantage depending if the shares in question make a reasonable move while employing this Bed & Breakfast type strategy

The investor is now long Vodafone shares via a spread bet and so any profit generates will be tax free - That's the bonus especially if the shares shoot up by 10% or more

But if Vodafone shares were to fall then the loss on the spread bet trade is not off-settable against tax - and that's the disadvantage.

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