Trading Taxes in the UK
UK trading taxes are often misunderstood. Whether you are day trading CFDs, stocks, forex, or futures, there is a lack of clarity as to how taxes on losses and profits should be applied.
This article will break down how trading taxes work, with reference to a landmark case. Our team also offer tips for meeting your tax obligations.
This page is not trying to offer tax advice. It aims to clarify HMRC’s approach to online trading activity. Before you file your tax returns, it is advisable to seek professional tax advice.
Key Takeaways
- For UK tax purposes, trading activity may be treated as trading (taxed as income), investing (taxed under Capital Gains Tax), or in some cases betting/gambling (for example, spread betting).
- Tax obligations depend on how HMRC classifies your activity and the products you use. Most individuals are treated as investors and pay Capital Gains Tax unless their activity clearly amounts to a trade, in which case profits are taxed as income.
- Other factors that HMRC consider are the frequency of trades, how instruments were purchased and whether the motivation was solely to generate profit.
- Traders should keep a record of their yearly trading activity ahead of filing a tax return, including instrument details, entry and exit points, and price.
The Best Brokers In The UK
These are the top brokers in the UK with integrated tax reporting tools:
Tax Classifications
Part of the confusion surrounding HMRC trading taxes stems from the fact that everyone’s activities are different. The tax treatment of forex depends on how you trade it.
For example, profits from spread betting on forex are generally treated like gambling and are not taxable, but you can’t claim tax relief for losses. Profits from CFDs or direct forex trading are typically subject to Capital Gains Tax (or, in rare cases, income tax if HMRC considers you to be trading).
So, UK tax implications are equally concerned with how you approach your trading activities as to what it is you are trading. The instrument is just one factor in your tax status.
In practice, it is helpful to think in terms of three broad outcomes for individuals: activity taxed as trading (income tax), as investing (Capital Gains Tax), or in some cases as betting/gambling (for example, spread betting). HMRC decides which applies based on the facts of your case, using the ‘badges of trade’ and other factors.
1. Speculative
The first category is speculative in nature and similar to gambling activities.
Where activity is treated as betting or gambling – for example, most retail financial spread betting – profits are not normally subject to income tax or Capital Gains Tax, but losses are not tax-deductible.
2. Self-Employed
The second category taxes trading activity in the same way as a normal self-employed individual undergoing business activity is taxed.
Traders may be liable to pay income tax on their profits (and, for individuals, Class 2 and Class 4 National Insurance), with losses potentially qualifying for trading loss relief under the usual rules.
3. Private Investor
If a trader is classed as a private investor, their gains and losses normally fall under the capital gains tax regime. The benefits and drawbacks of which are detailed further below.
It is worth bearing in mind that because trading activity fluctuates, it is possible to fall within all of these three categories over a given period.
Day Trader vs Investor Status
Whether you’re classed as a day trader or an investor could make a serious difference to your tax obligations.
The Difference
The crucial distinction is that a ‘trader’ will not hold on to shares in the long term. Whereas, an investor will hold shares for use as assets to then generate revenue, dividend income, for example.
For most individual UK residents who buy and sell shares on their own account, HMRC treats them as investors, so profits and losses fall under Capital Gains Tax. Only in relatively rare cases, where activity is frequent, organised and business-like, will HMRC treat share dealing as a trade, so that profits are taxed as income and trading loss relief may be available.
Which Classification Is Advantageous?
Before 6 April 2008, Capital Gains Tax (CGT) rates for individuals were aligned with income tax, so higher-rate taxpayers could pay up to 40% on gains. However, taper relief could reduce the effective rate on long-held business assets (sometimes to around 10%) and on other assets.
From 6 April 2008, a single 18% CGT rate was introduced, and taper relief was abolished. At that time, this simplified CGT and altered the balance between long-term investors and traders, although CGT rates have since changed again, so you should always check the current rules.
Where HMRC accepts that your activity amounts to a trade, you may be able to claim trading loss relief, allowing certain losses to be set against other income (or carried back), subject to the usual conditions. This sideways loss relief is part of the general trading loss rules and was not created by the 2008 CGT changes.
It is worth noting that if you claim trader status to benefit from loss relief, HMRC may take a closer look. Due to this supposed advantage of investor status, day trading tax rules in the UK may toughen up in the coming years.
Classification Process
HMRC consider the ‘badges of trade’ to determine whether your activity will be classed as trading or investment in nature.
Whilst tax rules and regulations remain somewhat grey, judicial decisions and best practice have clarified certain criteria and factors.
Motivation
Despite being one of the hardest areas to make an accurate determination on, this is a key component.
If HMRC believes your motivation for trading is to generate profits, this will impact whether they consider your activity as trading for taxation.
Of course, they do not simply take your word for it. Instead, they look at the facts surrounding your transactions. They may consider the following:
- Was it a one-off trade? Alternatively, have there been numerous trades of the same nature, carried out similarly to ordinary traders?
- Is this your sole occupation? Alternatively, do you have other employment, suggesting you don’t trade purely to make a living?
- What do you do with your profits? Do you reinvest them into more trading activity?
Transaction
HMRC can examine the circumstances surrounding the transaction to identify a trading motive. They may consider the following:
- How you acquired the shares – Did you purchase or inherit them? If you sold inherited shares, it would probably be less likely to be classed as trading, and is more likely to be considered investment activity.
- Timing – What was the length of time between the purchase and sale date?
- Means – Did you use finance to buy your instrument?
- Cause – Did a sale take place in an emergency? If so, it’s less likely to be considered as trading.
- Frequency – Is there evidence of a pattern of trading behaviour? Are you regularly buying and selling your chosen instrument? This is one of the most important areas of consideration.
Whilst all the above factors may be taken into account to determine your financial trading tax obligations in the UK, HMRC will usually treat shares and similar financial instruments as investment assets, unless the overall pattern of activity clearly amounts to a trade.
Stock Taxes
In particular, stock trading tax in the UK is more straightforward. This is because there is a higher chance that share trading, by its very nature, will be classed as investments.
A judge highlighted the point by stating, “Where the question is whether an individual engaged in speculative dealings in securities is carrying on a trade, the prima facie presumption would be … that he is not.”
Having said this, a frequent pattern of buying and selling shares may lead HMRC to take a closer look and consider the argument for ‘trading’.
A Ali v HMRC
The case brought by Mr Akhtar Ali is an important example of how active share dealing can be treated for UK tax purposes. After he successfully appealed a decision by HMRC, the tribunal accepted that his losses from share dealing arose from a trade carried on commercially, so they could be relieved under the trading loss rules.
Ali won the right to treat his profits and losses from day trading as ‘trading’ profits and losses. This meant they would be subjected to the same sole trader tax rate as ordinary businesses in the UK.
His losses, which were in the hundreds of thousands of pounds, were allowed to be offset against the profits earned by his other business. This resulted in significant deductions in his overall tax liability. In fact, in several preceding years, a tax calculator established his liability at virtually zero.
The Facts
Mr Ali ran a successful pharmacy business and used some of the profits to buy and sell publicly listed shares. For several years, he treated this share dealing as investment activity and reported gains and losses under the capital gains rules. From 2006–07, he instead claimed that his share dealing constituted a commercial trade and treated the resulting losses as trading losses.
In 2005, he decided he was now a day trader. He argued his activities were done with the intention of generating income. He, therefore, believed he was carrying on a trade and any profits and losses should now fall under the business tax rules instead.
The HMRC ruling was in line with what many believed at the time (that losses would often exceed profits for day traders, and therefore, they were hesitant about classifying day traders as self-employed).
Final Verdict
In its 2016 decision, the tribunal held that Mr Ali was carrying on a trade, so his share-dealing losses could be offset against his pharmacy profits under the existing trading loss rules. The case does not mean that all day traders can automatically offset their losses against other income; each case still depends on its own facts and on whether a genuine trade can be shown.
It is easy to see why HMRC were unwilling to accept such a seamless transaction from investor to trader. The lines are difficult to draw and will likely lead to less revenue for the tax man.
The simple truth is that the diversity of a day trader’s activities doesn’t fit within a one-size-fits-all approach.
The best solution is to query with HMRC and seek advice first. It could save you considerable time and significant money.
Different Instruments, Different Taxes?
For individual investors, CFD trading profits are generally subject to Capital Gains Tax, whereas spread betting profits are usually not taxable for most UK residents. Different rules can also apply to binary options and cryptoassets. HMRC looks at both what you are trading and how you are trading it when deciding whether gains are taxed as capital gains or income.
Share trading tax implications are often similar to other investment activities: most individuals are treated as investors, with gains and losses falling under Capital Gains Tax, and only in relatively rare, highly organised cases will activity be treated as a trade and taxed as income.
Forex and other instruments may be taxed similarly when held as investments, but product-specific rules (for example, spread betting being generally tax-free for most individuals) mean they are not all treated identically.
However, if you remain unsure about tax laws surrounding your specific instrument, seek professional tax advice.
Tax Tips
1. Keep A Record
Your trading activity over the course of a year can vary between ‘speculative’, ‘self-employed’ and ‘investing’ activity. That means when it comes to filing your tax returns, you need a detailed account of all your trading activity, including details on:
- Instrument
- Purchase and sale date
- Price
- Entry & exit points
You can also make use of software which makes this process hassle-free. Some brokers, such as CMC Markets, also offer an integrated reporting tool which can provide a yearly summary of your trading activity.
2. Seek Advice
If you are unsure, we recommend contacting HMRC to seek clarification. Numerous tax advisors specialise in tax for day traders.
Bottom Line
UK taxes on forex, stocks, options, and currency day trading are not always clear. You will need to carefully consider where your activities fit into the categories above. It is also worth bearing in mind that failure to meet your tax obligations can lead to serious penalties.
Recommended Reading
Article Sources
- His Majesty’s Revenue & Customs (HMRC)
- HMRC Tax Assessment Guidance On Trading Profits
- A Ali v HMRC, Tax Journal
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