The image of spread betting as a gambling activity is carried on through the way in which spread betting gains are taxed in the UK, and for the purposes of tax, it remains quite a useful association. Remember – spread betting isn’t really gambling insofar as you can legitimately predict the outcome with logic and reason (rather than relying solely on chance or an individual performance), but as far as the UK tax authorities are concerned it’s a straightforward wager. Tax treatment might seem like an ancillary issue, but it’s actually extremely important, and can make the difference between a profitable trade and an unprofitable one, and the favourable tax treatment of spread betting ultimately leaves more of your earnings untaxed.
Key Points: Spread Betting and Tax
No Capital Gains Tax
No Stamp Duty
No Commission
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 shares 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; in other words, you only pay tax if you run spread betting as a business. 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 (Capital Gains Tax) 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.
Why the UK Does Not Tax Spread Betting
There was an eccentric discussion in the House of Lords regarding the taxation of spread betting on financial markets. Spread betting is when an investor speculates on the financial markets, and places their bet upon the future price of several financial assets such as a bond or stock. Moreover, it is also utilised in sports betting and it’s not such a surprise that the UK government doesn’t place taxes on this type of transaction, the answer being that the attempt to do such would lead to negative tax revenues which is negating the entire point of taxation.
Not paying tax especially on something the government has purposely decided to charge tax isn’t necessarily regarded as tax avoidance. The reason being that the decision not to tax is relatively quite simple; there wouldn’t be any tax revenue consequently there being revenue loss.
The entire point about all types including spread betting is that all winnings of people must be purely offset by the losses of another. There are companies in the mid-range who are tasked to organise things and they are taxed on their profit based on their accustomed manner.
Moreover, it is also becoming a standard part of the UK system of taxation that if there is going to be tax levied on the income of something, hence there will also be equal allowance against losses on doing exactly the similar thing (outside the UK territory different rules apply).
Hence, if there be an introduction on betting winnings, there will also be a need of a system of credits as well as allowances for managing losses in betting. Betting is considered a less than zero sum game and the winnings of any trader are obviously the losses of others respectively.
The taxed that is supposed to be charged should be equal to the tax credits gained, which ultimately means that the total winnings are equitable to less than the supposed total losses. The credits as well as the allowances for losses would be a little bit higher than any revenue gained from sustainable gainers. For this very reason, taxes on winnings are barred mainly because this would lead to revenue losses and not gains.
FAQs
Conclusion and Recommendations
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 savings makes spread betting an even more attractive investment style.
Spread betting can attract tax liability in the instance that it becomes the trader’s main source of income, at which point earnings are subjected to income tax according to the normal income tax laws. However, for the most part spread betting is a potentially highly lucrative, tax free form of trading.