To start examining the way in which spread betting is taxed, let’s look at how traditional share transactions are taxed as a basis for comparison. Bear in mind, it is possible to spread bet on the performance of individual stocks where offered by your broker, thus it is plausible that you could invest in exactly the same trade in the share and spread betting markets with entirely different results.
Tax On Trading Activities
A share transaction sees the transfer of ownership in a share, an asset. For starters, shares in the UK are liability to the payment of Stamp Duty, a form of tax that is applied on the total value of a transaction, expressed as a minimal percentage – for example, Stamp Duty for shares sat at 0.5% of transaction size. Particularly for leveraged transactions, this can be a significant tax liability to pay on each and every transaction over the threshold value. Without going too far into the intricacies of Stamp Duty and how it is calculated, this liability can be instantly removed from the equation when dealing with spread betting.
In order to realise a profit on a share transaction, you generally have to resell your shares, and this speculation with the intention to resell tends to be the core reason for most share purchases. This is where the most considerable tax burden comes into play – at the point of disposal. Capital Gains Tax is paid by UK individuals on any gains made on the disposal of capital. Effectively, CGT performs the same function as income tax on capital profits, and is charged at different rates depending on your level of capital and income. Not only is CGT expensive, but it is also highly complicated, and can be a significant administrative burden for traders, not to mention its financial impact.
Tax On Spread Betting Activities
In spread betting, no assets are changing hands. No transaction is taking place. No assets are being sold. It’s merely an intangible bet, or agreement between the trader and the broker, and it is taxed as a pure gambling activity – that means at a rate of 0%. The exception to the rule is where spread betting forms the core of your day to day income, at which point you will be liable to income tax on your earnings as with any other trade, business or job. However, as a starting point this can save a substantial proportion of your profits from the hands of the taxman, leaving more cash in your pocket at the end of the day.
Assume the rate of CGT is 20% and Stamp Duty is charged at 0.5%, (with all other reliefs and allowances exempted for simplicity’s sake). Buy 1000 £1 shares in Company X which you sell for £1.05 would yield a profit of £50, less 20.5%, which leaves £39.75 in profit. With a spread betting transaction on the same shares, you would be more considerably leveraged, earning a 500% return, which in turn would be tax free.
The significant savings afforded by the more preferable taxation of spread betting gains are one of the major pull factors for traders, and particularly when combined with the leverage effect of spread betting, can have a dramatic impact on the profitability of your trading activities.
One of the key advantages of spread betting is that it is taxed accordingly to considerably more favourable rules than other forms of trading. Essentially, spread betting is regarded by UK tax law as a gambling activity, and therefore the profits from spread betting are tax free – i.e., there is no capital gains tax to pay on the earnings generated. Because spread betting is based on asset prices, rather than trading in the assets themselves, it is also exempt from stamp duty, which when added to the CGT saving makes spread betting an even more attractive investment style.