Bed and Breakfast, Same Day Capital Gains UK

Question

1) What exactly is 'same day` rule, there is much talk about it all over the internet but no one seems to be able to explain what it actually is or how it works.

Does it mean If I purchased shares in a company on day 1 and sold the same day at a loss, it is not applicable as a capital gains loss for the year unless I purchased on another day and implemented the B&B rule? Confused.

2) Using a recent example of B&B can I confirm that my understanding is correct by displaying the following calculation of a recent loss I made.

Example A

Action  date        stock   price       commission  £Value
Buy     04-04-2016  78656   0.0253      10.00       1990.00
Sell    05-04-2016  78656   £0.01425    5.00        1120.85
Buy     06-04-2016  93429   £0.027775   5.00        2594.99

My first assumption is that these sells/holdings all fall within 30 days thus the B&B rule applies, and to calculate my capital gains I have to apportion 78656 shares to the newest purchase, thus my latest purchase has more shares then the previous purchase so all those shares fall within my most recent purchase.

So I calculate:

78656 * 0.027775 = £2184.67
2184.67 - 1120.85 = £-1,063.82

So this shows I made a capital gains loss of -£1,063.82, does this appear correct?

Additional: A capital gains loss that I could only claim IF I kept this share 30+ days to make it a section 104 holding?

3) From the above example lets say down the road the stock goes up and I sell my holding before 30 days, but I do not enter this stock again for 31+ days I can treat it like a simple 104 holding as my earlier B&B shares where accounted for?

Example B

Action  date        stock   price       commission  £Value
Buy     04-04-2016  78656   0.0253      10.00       1990.00
Sell    05-04-2016  78656   £0.01425    5.00        1120.85
Buy     06-04-2016  93429   £0.027775   5.00        2594.99
Sell    09-04-2016  93429   £0.04       5.00        3737.16

Thus

3737.16 - 2594.99 = 1142.17 Gain

1142.17 - 1063.82 = 78.32 True Profit

Or is my understanding incorrect that I could only declare the Capital Gains Tax IF I sold more then 30 days after I bought the second round of shares?

4) Is it true that a share you may own if sold for a profit or loss before 30 days section 104 status counts as a normal taxable amount (salary taxation rules) that needs to be added to your yearly wage, and vice versa for any losses amounted in the financial year?

Making the assumption my above question is true and the B&B rule does not apply against non Section 104 holdings then perhaps this is closer to the case.

Example C

1st Jan Company ABC - BUY 1000 stock - 5000
3rd Jan Company ABC - SOLD 1000 stock - 10,000
4th Jan Company ABC - BUY 1000 stock - 20,000
5th Jan Company ABC - SOLD 1000 stock - 19,000
Profit/Loss - Purchase Price
(10,000 + 19,000) - (5,000 + 20,000) = 4,000
Year Salary 20,000 + (4,000)
Salary tax modified 24,000 / 0.2 = 4,800 tax payable.

Answer 1

The 'same day rule' in the UK is a rule for matching purposes only. It says that sales on any day are matched firstly with purchases made on the same day for the purposes of ascertaining any gain/loss. Hence the phrase 'bed-and-breakfast' ('b&b') when you wish to crystalise a gain (that is within the exempt amount) and re-establish a purchase price at a higher level. You do the sale on one day, just before the market closes, which gets matched with your original purchase, and then you buy the shares back the next day, just after the market opens. This is standard tax-planning. Whenever you have a paper gain, and you wish to lock that gain out of being taxed, you do a bed-and-breakfast transaction, the idea being to use up your annual exemption each and every year. Of course, if your dealing costs are high, then they may outweigh any tax saved, and so it would be pointless. For the purpose of an example, let's assume that the UK tax year is the same as the calendar year. Scenario 1. Suppose I bought some shares in 2016, for a total price of Stg.50,000. Suppose by the end of 2016, the holding is worth Stg.54,000, resulting in a paper gain of Stg.4,000. Question. Should I do a b&b transaction to make use of my Stg.11,100 annual exemption ? Answer. Well, with transaction costs at 1.5% for a round-trip trade, suppose, and stamp duty on the purchase of 0.5%, your total costs for a b&b will be Stg1,080, and your tax saved (upon some future sale date) assuming you are a 20% tax-payer is 20%x(4,000-1,080) = Stg584 (the transaction costs are deductible, we assume). This does not make sense. Scenario 2. The same as scenario 1., but the shares are worth Stg60,000 by end-2016. Answer. The total transaction costs are 2%x60,000 = 1,200 and so the taxable gain of 10,000-1,200 = 8,800 would result in a tax bill of 20%x8,800 = 1,760 and so the transaction costs are lower than the tax to be saved (a strict analysis would take into account only the present value of the tax to be saved), it makes sense to crystalise the gain. We sell some day before the tax year-end, and re-invest the very next day. Scenario 3. The same as scenario 1., but the shares are worth Stg70,000 by end-2016. Answer. The gain of 20,000 less costs would result in a tax bill for 1,500 (this is: 20%x(20,000 - 2%x70,000 - 11,100) ). This tax bill will be on top of the dealing costs of 1,400. But the gain is in excess of the annual exemption. The strategy is to sell just enough of the holding to crystallise a taxable gain of just 11,100. The fraction, f%, is given by: f%x(70,000-50,000) - 2%xf%x70,000 = 11,100 ... which simplifies to: f% = 11,100/18,600 = 59.68%. The tax saved is 20%x11,100 = 2,220, versus costs of 2%x59.58%x70,000 = 835.52. This strategy of partial b&b is adopted because it never makes sense to pay tax early ! End.