Spread betting is one of the United Kingdom’s most popular forms of financial day trading, for a variety of reasons. Many like the fact that it’s quick and accessible; indeed anyone with the credit rating to open an account with a broker is able to get involved, even if we’re only talking trades in pennies. Many other people however, like the idea of spread betting because in the UK and some other countries it is generally tax-free. There are however some inconsistencies in the guidelines, and it’s good to know exactly where you stand in order to make sure you don’t get on the wrong side of Her Majesty’s Revenue and Customs.
The top-line rule is usually regarded to be that if you’re actually carrying on the trade rather than it being a simple opportunity, then HMRC may well try to tax you. This most commonly arises if you are a professional day trader, whereby the majority of your income comes from financial trading and spread betting in particular. It makes sense after all; if you’re earning money just as any other worker in the country, you will pay the usual rates of income tax.
If you’re not spread betting full time, then it can sometimes be quite difficult to work out whether or not you should be taxed or not. And let’s remember that this is a very important consideration to make. Firstly you’re legally obliged to pay taxes where applicable, but also, the incurring of tax could potentially make a position you thought was very profitable turn into one which is potentially wasteful and risky. You really do need to know where you stand.
There are two sections of guidelines that deal with spread betting, and unfortunately they are not wholly clear, and leave things open to a certain degree of interpretation. This is not at all something you want when dealing with financials, but it’s something that most spread betters in the UK have become used to. These guidelines are the following:
- “The taxpayer placing a spread bet is not normally carrying on a trade. They are not taxable on the profits, nor do they receive relief for their losses.”
- “To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.”
These guidelines suggest that spread betting is not trading as such; the position is not carried on; no assets ever actually change hands. It’s not quite gambling either though, because those profits are never taxable. This “economic substance” is generally regarded to mean how significant the income is to the trader. As already mentioned, if this is your main income, you probably need to be paying tax on it.
Ultimately, provided you aren’t making your living from spread betting, most would agree that it can be considered free of tax. Indeed, if you look at brokers such as ETX Capital, spread betting is advertised as being free from capital gains tax. Having said that, it would be foolish to assume that consistent and regular profits arising from successful spread bets would not draw the attention of the tax authorities; there is after all a reason that the guidelines are not cut and dry in favor of the day trader. You should also regularly check for updates, as tax rules are not static and could change at any time.