Many people generally assume that spread betting is tax free in the UK, especially under the new rules from 2014. However, this assumption is not always accurate. The main reason why there is always confusion regarding spread betting taxes is mainly because of the nature of the trade. Some people consider spread betting as gambling hence cannot be subject to tax, while others consider it trading which is subject to income tax, while still others think its investment which is subject to CGT.
So, What Really Is Spread Betting?
Spread betting is simply day trading with a twist: no assets change hands! But, if one can accurately predict how the market will be, they make money. According to BIM22015 in review of the tax law in 2013, a taxpayer who places a spread bet is not considered as carrying out a trade; and is therefore not liable for tax on profits or relief for losses.
However, there are some exceptions that are stipulated in BIM22020. The only spread betting win that attracts tax is not merely what comes from the opportunity but if it arises from carrying on a trade. However, whether or not a win will be taxed will depend on the terms stipulated in the contract as well as the economic substance of the trade.
Why Do People Spread Bet?
Accurate spread betting can be more profitable compared to regular trading. This is in the sense that you stand to win a bet whether the markets rise or fall. Other advantages of spread betting include tax exemption, 24-hour-a-day trading period and the ability to bet on a wide range of markets. Additionally, you can also learn how to lower the risks and boost your gains, the Euro trade call in 2013 being a good guide on how to achieve that.
As a common rule, the profits made from spread betting are not subject to Capital Gains Tax in the UK. This is a major bonus since betters get to save a big chunk of the gains that would have otherwise gone to the tax.
There are numerous other benefits that are associated with spread betting. Since the spread bet is leveraged, you only need to make a deposit representing a small percentage of your position’s full value. This percentage is called the margin. This translates to higher possible profit or loss from the initial capital needed compared to regular trading.
Is Spread Betting Really a Tax Free Venture?
Simply put, the answer is yes. Spread bet wins are exempt of the Capital Gains Tax, which is levied on all trading profits. Capital gains usually refer to the difference between an investment and what is eventually realized once the investment is disposed. It is also important to note that spread bet wins do not attract stamp duty or commissions.
However, one thing that many people fail to understand is that it can only be tax free if it is not your main source of income. Therefore, if you want to benefit from the tax free spread bets, you may want to list your job description as something other than trader.
How to Avoid Taxes Associated With Spread Betting Sites
Now, before you start packing some bags in preparation for a holiday at Her Majesty’s land, here is a quick reminder. Avoiding tax is simply arranging affairs in a way that permits you to pay no more than necessary tax, which is legal. On the other hand, failing to pay tax is referred to as tax evasion and is illegal. It is common to find some tax avoidance plans that are actually state sponsored.
Spread betting is mainly considered as gambling rather than investment, which is the main reason why it does not attract capital gains tax. When spread betting, you simply place a bookmaker on the performance of a particular company’s shares price. The fact that losses are more likely than wins makes the HMRC exempt it from taxes since they also do not want to offset the losses.
There are a few things you can do to ensure that you do not pay tax unnecessarily. First of all, ensure that the betting is not your sole source of income. If you make spread betting your sole income source, it will be considered as trading, which attracts the capital gains tax.
You can also take advantage of the hedging plan in which you place long and short spread bets on the same shares. For example, supposing you bag a hefty profit on your shares. Now, instead of just handing over a chunk of it as tax, you can place a short term bet on that same stock. In this way, any subsequent fall in your longer term position will be offset by the tax free rise in the value of the short spread bet.
It is important to note that the current laws on spread betting exempt spread bets. However, the market, laws, rules and regulations are always subject to change, as Alessio Rastani so candidly put it.