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Is Spread Betting Tax Free?
Spread betting has become popular in recent years, not least as a way to potentially make large profits and to follow the markets without having to own the actual assets. But one question that many spread bettors ask is this: is spread betting tax free?
On the face of it, the answer’s yes: many of the taxes that are levied on other forms of investment are not levied here.
This goes for capital gains tax and stamp duty – and also, in most cases at least, for income tax. But the situation is a little more complex than it seems at first glance.
This article will explore the topic and look at whether spread betting can be considered a tax-efficient investment or not.
Spread Betting Brokers
Spread Betting Tax Implications
First of all, it’s worth thinking carefully about what spread betting is – and whether it applies to your circumstances.
Spread betting is a form of trading which offers derivative, leveraged financial products: they come with high risk, but high potential rewards too. But when considering the tax implications, it’s vital to separate it out from other, similar forms of trading.
It’s often confused, for example, with trading contracts for difference. But profits from contracts for difference are taxed under Capital Gains Tax rules – whereas spread betting profits are not.
The way that profits are calculated on each type is often also slightly different, too.
The Tax Implications
When it comes to spread betting’s tax implications, it’s important to note that there are all sorts of different potential taxes which might be relevant.
Most traders will probably jump to the conclusion that the only one they need to think about is income tax – but the reality is that trading is complex, and it can activate all sorts of aspects of the taxation system that the average person may not have considered before.
The most relevant tax is perhaps capital gains tax, which is often referred to as CGT for short. Profits made from spread betting are not liable for this tax, which given that it can, in some cases, have a 20% rate, is definitely a good thing.
Those who have bought and sold properties will be familiar with stamp duty, or specifically the Stamp Duty Land Tax.
But stamp duty as a general category applies to more assets than just property, and some aspects of share trading fall into its sphere of liability. Luckily, though, spread betting profits do not.
This is because spread betting products are actually derivatives which track the asset in question, and do not actually confer any ownership of the “real” asset.
So while it might appear that you’re trading, say, Facebook stock, what you’re actually doing is investing in a financial product that tracks it and delivers profits or losses on the basis of how the real thing performs.
From a tax perspective, this is positive news as it puts it in a different category to – say – stock trading.
Finally, it’s important to consider the implication when it comes to income tax.
According to the Money Advice Service, this is where the exact definition of the “betting” side of spread betting comes into play.
Spread betting is, for income tax purposes, treated as gambling – which means that profits made on it do not fall under the income tax jurisdiction.
The Money Advice Service does, however, caution that this situation might change in the event that a person relies on their income from spread betting to earn a living.
In that case, it could be re-categorised as an example of a “trade” – and that could mean there is some income tax to be paid.
For that reason, it is well worth consulting a professional to see if your spread bets might be pushing you into this category – especially if your spread betting profits are high.
So far, this article has investigated only whether or not the profits earned by spread bettors are taxable.
What about losses? In some circumstances, losses made through trading can be treated as tax-deductible – which means that they can be offset against other taxable profits made in other ways, bringing down the overall tax liability of the individual.
It is not, however, the case that spread betting losses can be used in this way. So while tax efficiency is the order of the day when it comes to profits, the trader can’t bank on their losses being able to be used to save cash.
Individual – And Changing – Circumstances
Currently, the situation for most traders is that spread betting is quite tax-efficient. But there are two important notes of caution which ought to be sounded.
The first is that, as with almost all tax situations, the individual’s situation can be relevant alongside the wider tax rules.
As the point about income tax made above demonstrates, the precise situation an individual is in can vary from person to person.
As a result, it’s important for anyone who is spread betting to get some independent advice from a qualified tax professional before they proceed.
Secondly, spread bettors should always make sure that they keep an eye on any changes to the government’s approach to spread betting tax treatment.
Just because capital gains tax, for example, is not levied on spread betting profits right now, does not mean that it never will be levied in the future.
It’s the responsibility of the taxpayer to check whether or not rules apply to them, so it may be worth periodically doing some research and keeping an eye on annual budget announcements.
Spread betting is a great choice for many traders, not least because profits are treated in a largely advantageous way when it comes to taxation.
While the circumstances of individual traders make it prudent to check with an advisor, and while there’s no guarantee that tax laws will not change in the future, it’s also the case that spread betting remains on the whole very tax-efficient.
So, is spread betting tax free? For the vast majority of UK traders, yes.
SpreadBetting vs CFDs – Pepperstone