How Spread Betting Offers Tax Advantages in the UK
The UK has proven to be one of the most favorable locations for spread bettors to trade in terms of tax advantages. Still, it’s important to understand how the HMRC exempts taxes on spread betting to maximise profits and avoid unexpected liabilities.
Tax Rules on Trading the Financial Markets in the UK
Trading shares, stocks, contracts for differences (CFDs), futures, and options requires filing a tax report on capital gains. Investors holding assets with profits above £6,000 are subject to capital gains tax. Forex traders who declare trading as their source of income will also be subject to income tax in addition to capital gains tax. The only exception where trading is tax-free is in spread betting. Unlike other forms of trading that involve owning the assets, spread betting simply involves trading on a derivative without owning the underlying assets. Since spread betting does not involve owning possessions, the HMRC does not subject it to stamp duty. This gives spread betting a unique edge over other forms of trading in terms of tax benefits.
Tax Benefits of Spread Betting
Spread betting is speculative trading, and it involves placing a bet on the price movement of an asset. The asset can be a stock, option, cryptocurrency, or any other financial instrument. Even after a trader realises profits during spread betting, the HMRC does not require them to pay capital gains tax except under a few exceptions. Here are the tax advantages and scenarios where it applies:
1. Zero Capital Gains Tax
In the UK, the financial regulatory agency views spread betting as gambling and, as such, exempts it from capital gains tax requirements. Getting relief from capital gains tax enables traders and investors to save more of their realised profits when spread betting compared to other forms of trading. To illustrate the impact of paying capital gains tax, assume a trader buys the Financial Times Stock Exchange 100 Index ETF for £10,000, and the value rises by 10%, bringing the entire asset to £11,000. When the trader sells the FTSE 100 ETF, a gain of £1000 is realised. If the trader has not made any other gains in the current year, then the £1,000 gain is within the baseline £6,000 allowance, so no tax is due. However, if the trader had already used up the capital gains tax allowance on other trades, the £1,000 gained would be taxed at 10% or 20%, depending on the trader’s income bracket. But if the trader places a spread bet predicting the FTSE 100 will rise and the index rises by 10%, the broker will pay the broker £1,000 profit with no capital gains tax or income tax.
2. No Stamp Duty
The HMRC collects a duty of 0.5% on any transaction involving the purchase of shares. Although this applies to transactions over £1,000, it can quickly accumulate to a worthwhile sum after several trades. Take, for example, a trader who closes a total of ten trades worth £10000 each. A 0.5% Stamp Duty Reserve Tax (SDRT) on each trade brings the total amount up to £500, which is significant considering other trading fees. Spread bettors are exempt from such fees, as they do not need to register any ownership document, which means they are not obligated to pay stamp duty.
3. No Income Tax
Another major tax benefit spread bettors get is an exemption from income tax. Since spread betting is classified as gambling, gains are not classified as earned income. This allows traders to keep more of their profits with multiple trades. Although spread betting presents a number of advantages in terms of taxes, there are a few exceptions to note.
Exceptions to Tax-free Spread Betting
Spread betting is generally tax-free but with a few exceptions:
- Professional spread bettors will need to pay income tax. The HMRC recognises all who make spread betting their only or main source of income as professional spread bettors.
- Trading through a limited company as a way to hedge against business risk will necessitate paying corporation tax. This is because the HMRC will consider this speculative bet to be a trading activity of your company.
- Other activities that may prompt the HMRC to label spread betting as taxable include running marketing services for trading services and operating a business-like structure with core actions like hiring employees and payroll management. Under such circumstances, the HMRC may impose income tax and National Insurance Contributions.
- Lastly, while spread betting profits are tax-free, any losses incurred cannot be offset against other taxable income or gains. This is different from traditional trading involving shares, CFDs, or forex, where traders and investors can use their losses to reduce their Capital Gains Tax liability. Spread bettors who are obligated to pay taxes will have no tax-deductible benefits if they account for losses rather than gains on their accounts.
Final Thoughts on Spread Betting Tax Status
While the HMRC keeps updating tax rules surrounding securities trading, current guidelines treat spread betting as a gambling activity and not a trading activity. Due to the HMRC classifying spread betting as gambling, it is generally tax-free. However, there are a few exceptions to this rule, especially for professional traders for whom spread betting is their main source of income and businesses that use it to hedge against risk.