Bed and breakfast deal

What is a bed and breakfast deal?

Bed and breakfast deal is an operation on the London Stock Exchange in which the owner sells shares or securities in the evening and arranges with a broker to buy the same shares the next morning immediately after the market opens. It allows investors to minimize the amount of capital gains taxes they must pay. If there are unexpected events in the market, the transaction fails.

How the bed and breakfast deal works

Traders make bed and breakfast deals to maintain their investment portfolio and minimize capital gains taxes in the UK. Traders close positions at the end of the year and reopen positions immediately on the first day of the new fiscal year to take advantage of the annual tax exemption. Since this practice is deliberately aimed at limiting capital gains taxes, the tax authorities have worked diligently to keep bed and breakfast transactions to a minimum. Finally, in 1998 they effectively banned the practice with the 30-day rule.

Because of this rule, the traditional bed and breakfast deal is no longer possible to make in a simple way. The trader must now wait 30 days before repurchasing shares, which is good for capital gains tax planning purposes. However, this isn’t always attractive to those who wish to stay in the market.

Imitation of bed and breakfast deals with CFD

Traders in the UK are able to make B&B deal using Contract for Difference (CFD). CFD allows you to earn on the difference in the value of a particular asset from the moment the contract is opened to the moment it is closed. A trader can use CFD as a floating ring to make sure that the price for this asset won’t change and will keep for them.

So, the trader sells his/her asset and buys a CFD. After 30 days, he/she exchanges back CFD on their asset without loss.

The example of bed & breakfast deal

Let’s imagine you bought 10,000 Crocs shares 6 months ago at $135.5 and the Crocs share currently costs $135. You call your regular stockbroker and sell the shares for $135, understanding a loss of $5,000.

Then you immediately call your CFD broker and buy 10,000 Crocs shares. Remember that if you buy a CFD to reflect a long position of 10,000 Crocs shares, the broker will usually go out and buy those shares in the market. This ties up the broker's capital and the company would like to be compensated for this. So, regardless of the initial margin you paid to buy the CFD, you will be charged a daily interest rate on the entire reward.

At an interest rate of 5% per annum; this equates to $184.93 per day, for a total of $5732.83 over 31 days. After 31 days, the CFD position is sold at the prevailing Crocs share price. Immediately after selling the CFD, you call your regular stockbroker and re-buy 10,000 Crocs shares. The Bed & Breakfast deal has been completed.

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2022-03-09 • Updated

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