Bed,Breakfasting and Scalping

[arabstrap303]

Hey All,

FIrst post so apologies if this isn't the right place - any suggestion as to where the best place to get advice would be is greatly appreciated - I'm guessing here's good as hopefully one or two of you chaps will have encountered this before and its UK CGT specific.

My strategy is that of a classic rose tinted glasses newbie. I want to effectively take small scalp trades of price fluctuations. but not necessarily day trade - could be a couple of days - whatever - just for as long as it take to make my target price, and then buy back the equity when it drops again to repeat the process.

For instance:

Buy 1000 of share X @ £1 + stampduty and commission.
Sell 1000 share X @ £1.10 + commission 2 days later

and then if stock falls back to £1, I repeat again 2 days later. And again and so on.

With this I make 100 quid minus commission each time, of which I'll pay CGT on if I make over the threshold.....

So digging deeper I discovered that HM Revenue has these so called bed and breakfasting laws which (seemingly) mean that for a buy and sell and buy back, within 30 days, it's as if the original sale didn't happen. Fine, but what happens to the sell again? Does this mean that each sale in between is free of CGT??? Surely not - but If so - great! And If not, what's the deal - especially in a more complex scenario where this happens..

------
Buy 1000 of share X @ £1 + stampduty and commission.
Sell 1000 share X @ £1.10 + commission 2 days later

Share drops like a stone in 2 days.

Buy 1000 of share X @ £0.50 + stamp duy and commission
Sell 1000 share X @ £0.55 + commission 2 days later
---

What's my tax position here - surely not a capital loss for tax purposes?? - note I didn't double my holding as I know they match the same amount of shares....another 1000 would definitely be classed as a new purchase as those are a different 1000 shares.

I have absolutely no problem with paying the correct amount of tax (% of profit on each trade), but these laws confuse things a lot. Thanks so much to anyone who can clarify this!

Anyway, I know I can trade within a Self Select ISA to avoid any problems, but for instance interactive brokers don't offer a self select ISA and their platform is very appealing. I also know I could use spreadbets etc...but I'm more confident with bona fide equities for now.

Ok - thanks again in advance for any help!

 

[grantx]

Arab,

I didn't know "Bed and Breakfast" still existed.

I'm guessing here but I think it was designed so that people could use their CGT allowance while maintaining their original portfolios. So they would sell their shares one day and buy them back the next. Or it may have been done the same day.

Even assuming it's possible, I think what your proposing may be regarded as a somewhat cynical exploitation by the Inland Revenue. I doubt they would allow it. Then again, if it's legit, you may have a case.

Grant.

 

[arabstrap303]

Hi Grant - thanks for the response. Yep sadly I believe it does still exist, most sites refer to it and there's a reasonable amount about it on the IR website..

I completely agree it would be an exploitation of the rules - and I'm not looking to do so! It just looks like an additional layer of complexity for anyone wanting to trade like this which wasn't really introduced to catch them, but as you say, others who wanted to realise their yearly allowance.

Its infuriating that because of this I have no idea what my tax position would be. There could even be really weird cases like this:

Buy at £1. Sell at £1.10. Share rockets. Buy at £1.90, sell at £2. Two 10p profits, but it as a £1 gain within 30 day period, and I pay more in tax than I made in profit. Surely insanity.

I'm probably worrying over nothing, but who knows. Surely they can't argue with the following, a cheque for CGT Tax paid on all profits made above CGT allowance in tax year. That's all I want to do really!

Arab,

I didn't know "Bed and Breakfast" still existed.

I'm guessing here but I think it was designed so that people could use their CGT allowance while maintaining their original portfolios. So they would sell their shares one day and buy them back the next. Or it may have been done the same day.

Even assuming it's possible, I think what your proposing may be regarded as a somewhat cynical exploitation by the Inland Revenue. I doubt they would allow it. Then again, if it's legit, you may have a case.

Grant.

 

[grantx]

Arab,

I'm pretty certain that CGT is referenced to your tax year, based on total annual net profit (above the threshhold) rather than a specific holding time period (eg 30 days) during your tax year. What a nightmare that would be.

You could always go and live in Lichtenstein but don't talk to anyone from MI5 - they'll be fishing.

Grant.

 

[timsk]

Hi arabstrap303,
I've not heard of bed & breakfasting in a trading context before - this is a new one on me! There are a few threads in the taxation and accounting forum regarding CGT but, to the best of my knowledge, none of them address the specific issue that you raise. That said, this one might be of some interest:
http://www.trade2win.com/boards/tax...n-active-traders-benefit-new-18-cgt-rate.html
I have written to my local tax office, referencing the HMRC web page that is provided in the opening post of the thread, as I too want to know my tax status and liabilities. (I day trade U.S. equities.) When, or perhaps I should say IF I receive a reply, I'll post it the linked CGT thread.
Good luck with your enquiry and welcome to T2W!
Tim.

 

[arabstrap303]

Hi Tim,

Thanks for that - some very interesting info in that thread! I'm not quite at the stage of quitting my day job yet - but that's the sort of advice i'd no doubt be needing when I do. I look forward to reading the response you hopefully get out of them. In the mean time, I'm going to not worry about this, when and if the opportunity arises, I think we can all agree that its a pretty convincing argument that i've not done anything wrong so long as I was to pay out the correct amount of tax according to overall profit.

Thanks again Grant - I'll check out the lichtenstein housing market at the first opp I get!

Hi arabstrap303,
I've not heard of bed & breakfasting in a trading context before - this is a new one on me! There are a few threads in the taxation and accounting forum regarding CGT but, to the best of my knowledge, none of them address the specific issue that you raise. That said, this one might be of some interest:
http://www.trade2win.com/boards/tax...n-active-traders-benefit-new-18-cgt-rate.html
I have written to my local tax office, referencing the HMRC web page that is provided in the opening post of the thread, as I too want to know my tax status and liabilities. (I day trade U.S. equities.) When, or perhaps I should say IF I receive a reply, I'll post it the linked CGT thread.
Good luck with your enquiry and welcome to T2W!
Tim.

 

[grantx]

Timsk,

I'm assuming you are self-employed and therefore your tax return would come under a "self-assessment".

Therefore, for an immediate response may I suggest rather than waiting for a reply to your letter, you give enquiries a call on the freephone number (it's on the Self-Assessment web site). These people are really helpful and know their stuff. They're also really friendly.

Grant.

 

[timsk]

Hi Grant,
As I understand it, (and I way well have misunderstood it!) - if I'm taxed under the CGT provision, then I wouldn't pay Income Tax as well. So no, I don't think I am self employed, at least, not for tax purposes. But that's the crux of my letter to HMRC - I want them to clarify the situation which is a grey and muddy area - to say the least. I take your point about phoning them as they're generally helpful and friendly. However, I've got my fingers badly burnt in the past by 'officialdom' because I was told something in person or over the phone which later turned out to be incorrect. Hence the letter; I want an answer in black and white on official notepaper!

Tim.

 

[grantx]

Tim,

You may care to read these (not quite bed-time reading):

HM Revenue and Customs: Rates and Allowances - Capital gains tax
HM Revenue & Customs: CGT/FS1 Capital Gains Tax - A Quick Guide

I must admit it isn't clear whether one pays either income tax, cgt or a combination.

Grant.

 

[Glenborrell]

Why not use an Spread Bet Account

Not sure if you have considered this but why not use an SB broker.

SB accounts are classed as gambling and therefore do not attract capital gains tax (well that's what i thought).

Correct me if i'm wrong but wouldn't that be a good option?

Cheers,

Glen

 

[Hoggums]

The round trip costs of buying (liquid) shares is approx 3% of the capital invested. This means you are relying on price fluctations of >3% - which even in this volatile market is extremely difficult to get right.

Personally I think you would have to be extremely gifted to profit from such a strategy. I'm not saying that you aren't the one.....

 

[arabstrap303]

Sorry for my tardiness in responding.

Not sure if you have considered this but why not use an SB broker.

SB accounts are classed as gambling and therefore do not attract capital gains tax (well that's what i thought).

Correct me if i'm wrong but wouldn't that be a good option?

Cheers,

Glen

It is a good option yep - and I think eventually I will move this way, at the very least as some sort of hedging tool. However, for now, I'm going for the trade within an ISA option - quite expensive fees too, but I'll sort that out eventually. I just prefer buying the equities rather than spread bets. It's a psychological thing, but to me it feels more solid.

The round trip costs of buying (liquid) shares is approx 3% of the capital invested. This means you are relying on price fluctations of >3% - which even in this volatile market is extremely difficult to get right.

Personally I think you would have to be extremely gifted to profit from such a strategy. I'm not saying that you aren't the one.....

The round trip cost is an absolute killer yeah - especially with my Self select ISA's fees which are on the high side (don't ask why - I'm an idiot). However, once i get the balls to deal with large enough amounts that brings down the round trip to about 1.5%. Which is more feasible. And yeah - i'm finding out just how difficult this can be at times ... I'm stuck in two losing trades at the moment which I'm been sitting on, and not been hard enough to cut my losses on yet. But I reckon once i've learnt to take the emotion out of it and then i'll hopefully be on the right track. Yep, I'm not the the chosen one ... yet.

But ...it feels like the way forward - and it's quite good fun!

Such a laugh in fact that I *think* I can get just about get by with this for a living - maybe not a champagne lifestyle but I'm not after that anyway. Just something more fun than being in an office and giving me more time to enjoy life would do very nicely.