Bed and Breakfast and Call Options

[billyfreezer]

So I've sold some shares in order to take advantage of my CGT allowance for the year. With good fortune, there's been a drop in the stock and I would like to buy it back, but have to wait the full 30 days if I want to use my allowance.

Question is, how does call options affect this? If I buy options for a month's time, which would be exercised after the 30 days, am i right in thinking that technically I'm buying the shares when they're exercised? Will this work/ is this allowed?

[Lootman]

So I've sold some shares in order to take advantage of my CGT allowance for the year. With good fortune, there's been a drop in the stock and I would like to buy it back, but have to wait the full 30 days if I want to use my allowance.

Question is, how does call options affect this? If I buy options for a month's time, which would be exercised after the 30 days, am i right in thinking that technically I'm buying the shares when they're exercised? Will this work/ is this allowed?

I think it would depend on what the strike price was relative to the market price.

So if your call option was deep in the money then it would effectively be a long position in the share, and I suspect HMRC would take a dim view of that. The same would apply if you instead used a short put position that was in the money.

If on the other hand the call option was out of the money then it's performance characteristic would be markedly different from the underlying, and it should not be deemed a proxy.

The 100% safe way to play this is to buy an in the money call, then wait 31 days before selling the share, then wait 31 days to re-purchase the share, then wait 31 days to sell the call. You'd have exposure to the share throughout, but would have double the risk for the duration. Whether it is worth it when you consider commissions, spreads and time decay is another matter.

[Spet0789]

So I've sold some shares in order to take advantage of my CGT allowance for the year. With good fortune, there's been a drop in the stock and I would like to buy it back, but have to wait the full 30 days if I want to use my allowance.

Question is, how does call options affect this? If I buy options for a month's time, which would be exercised after the 30 days, am i right in thinking that technically I'm buying the shares when they're exercised? Will this work/ is this allowed?

I think it would depend on what the strike price was relative to the market price.

So if your call option was deep in the money then it would effectively be a long position in the share, and I suspect HMRC would take a dim view of that. The same would apply if you instead used a short put position that was in the money.

If on the other hand the call option was out of the money then it's performance characteristic would be markedly different from the underlying, and it would not be deemed a proxy.

The 100% safe way to play this is to buy an in the money call, then wait 31 days before selling the share, then wait 31 days to re-purchase the share, then wait 31 days to sell the call. Whether it is worth it when you consider commissions, spreads and time decay is another matter.

Unless I miss something, that’s just going to give 2x exposure over the tax year end. Rather than faff about with calls, surely the OP could just buy the stock instead of the calls in your example above.

[air04]

So I've sold some shares in order to take advantage of my CGT allowance for the year. With good fortune, there's been a drop in the stock and I would like to buy it back, but have to wait the full 30 days if I want to use my allowance.

Question is, how does call options affect this? If I buy options for a month's time, which would be exercised after the 30 days, am i right in thinking that technically I'm buying the shares when they're exercised? Will this work/ is this allowed?

Just in case you are not aware.. You could but it in spreadbet or CFD or ISA or gift to partner and he/she buys it. Call options will always have a extra cost, you will pay a premium.

Good luck
ap

[Lootman]

So I've sold some shares in order to take advantage of my CGT allowance for the year. With good fortune, there's been a drop in the stock and I would like to buy it back, but have to wait the full 30 days if I want to use my allowance.

Question is, how does call options affect this? If I buy options for a month's time, which would be exercised after the 30 days, am i right in thinking that technically I'm buying the shares when they're exercised? Will this work/ is this allowed?

I think it would depend on what the strike price was relative to the market price.

So if your call option was deep in the money then it would effectively be a long position in the share, and I suspect HMRC would take a dim view of that. The same would apply if you instead used a short put position that was in the money.

If on the other hand the call option was out of the money then it's performance characteristic would be markedly different from the underlying, and it would not be deemed a proxy.

The 100% safe way to play this is to buy an in the money call, then wait 31 days before selling the share, then wait 31 days to re-purchase the share, then wait 31 days to sell the call. Whether it is worth it when you consider commissions, spreads and time decay is another matter.

Unless I miss something, that’s just going to give 2x exposure over the tax year end. Rather than faff about with calls, surely the OP could just buy the stock instead of the calls in your example above.

It would be a double exposure for two months, as opposed to zero exposure for 1 month.

The reason to use options is that it avoids the need to buy an extra full position. Options can be purchased for a fraction of the value of the underlying.

Just in case you are not aware.. You could but it in spreadbet or CFD or ISA or gift to partner and he/she buys it. Call options will always have a extra cost, you will pay a premium.

The way to mitigate the cost of an options contract is to buy a long dated contract. The time value of an option does not decay in a straight line, but rather declines very slowly at the beginning and then the rate of decay increases as expiry approaches. Much of the time decay is in the last couple of months of the contract. So you'd probably want to use a long-dated option which you could probably sell for about the same price as the purchase price, absent market moves.

Also, the deeper in (or out of) the money the option is, the lower the time value anyway. Time value peaks at the money.

A bigger problem, for UK shares anyway, is the lack of liquidity in single share options, especially beyond the front two months, So the spreads could be punitive.

And of course contracts are only for lots of 1,000 shares.

[billyfreezer]

Interesting responses. From this I take it there's really not a definitive answer, and like with a lot of tax issues, it's HMRC's take on the 'spirit' of the action.

I understand that pros and cons of using options. Just wanted an idea on benefitting from the CGT allowance but not necessarily wanting to sellout of the shares for a while 30 days. I have done already, another 27 days to go before I can buy back, but with earnings coming up before the 30 days are up, didn't want to miss out per say.

Could go either way of course!

But just for future thought. Selling shares and immediately buying calls in the money, we reckon would be frowned upon? I wonder how the calculation would occur. Different scenarios here including selling the options, exercising them, or expiring worthless.

Buying calls out of the money for 1 years time.... possibly allowed?