Tax Free Profits with Spread Betting

I am amazed everyone has not caught on to this trading opportunity. For one there’s the tax issue. The main advantage of using spreadbets is of course that investors don’t have to incur stamp duty or direct commissions on any trades. These costs can be substantial when you are paying 0.5% of the value of share transactions every time you buy – and that’s before any broker’s commissions which is normally at least £15.

And let’s face it – most people are currently being taxed to death and can’t afford to work in rip off Britain. The establishment help themselves to about 30% of our wages in stamp and income tax. They are not content with that, every litre of fuel we buy they help themselves to a 65% of, every pint of lager we drink they rob a further 33% off us, if we smoke they take the p!ss and we have to pay them 88% of every pack of fags. If we drive to work we have to pay them more tax for using the road. Just incase they missed anything out, they add 20% tax onto everything else we buy, including our essential utility bills. The actual amount they take off us is probably over 60% of everything we earn.

In the UK, spread betting is regarded as gambling but is regulated mainly through the Financial Conduct Authority (FCA) rather than the Gambling Commission. At this point, the decision within the UK is that profits generated by spread betting are not subject to income tax or capital gains tax. There is a potential grey area concerning those who derive an income from spread betting and have no other source of income. This group could be liable for income tax on their spread betting winnings however it appears that this situation has never been tested.

I can’t understand why anyone buys the shares and exposes themselves to the risk of CGT. If you are disciplined you can just spread bet the amount of shares you would have bought. Then not only do you not have to pay CGT on the profits but also you only have to put up a fraction of the money in margin. There is absolutely no need to pay CGT with spread betting. IMHO it is a great advantage which HMRC allows but is clearly because they don’t want losses on ‘betting’ to be used against other taxable gains.

In any case the tax free part is why I spreadbet and do not buy the shares, plus as I think has already been said as long as you provide enough leverage (for nasty surprises) there is not that much difference in my opinion.  The obvious benefit being the tax free bonus and not having to mess around with an ISA locking in your profits.  Saying that I have lost money with spreadbets due to being silly and using small amounts of leverage to place risky / large bets and this is why I only made a modest amount last year.  Still I find spread betting better than buying in to a Fund.

Yes, I’m pretty sure there is no CGT but doesn’t the SB company pay the ‘betting tax’ up-front? Most turf accountants offer the choice of paying tax on the stake or on any winnings. I don’t think there’s an option with spread bets

Yes, there is a betting tax up front contained in the spread but it is so small as to be not even be noticed. No CGT or stamp duty. If you keep bets open for a long time and roll over every quarter there is a further charge, effectively an interest charge for the money you didn’t have to spend buying the shares.

If spreadbetting is ever taxed, it probably won’t be via CGT. Why not? Because the story I’ve heard consistently is that as a group, spreadbetting clients make overall losses. If that’s indeed the case, then if the government made it subject to CGT, they would be letting more realised losses than realised gains into the CGT system and so reducing the CGT take… Closing the stamp duty loophole for spreadbetting seems more likely to me – that would make the government money regardless of whether punters were winning or losing. But even this is difficult because spread betting in itself is a contract between two paties and not an exchange of assets…

Note: Most do not pay CGT…they only take profits within the limits…No point in selling shares just to pay that…in the long term they will rise so keep them and draw the allowable amount each year tax free…if you want more use spread betting…

One more thing if you don’t mind! Do I need to declare my winnings to tax man?

In most cases no!

Spread betting is gambling. You will not be taxed on your winnings if you are a UK resident individual not carrying it out as your trade.

The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green [1925] 9TC309:

“A bet is merely an irrational agreement that one person should pay another person on the happening of an event.”

This decision has stood the test of time. In an Australian case, Evans v FCT [1989] 20ATR922, 89ATC4540 Hill J said:

“There has been no decision of a court in Australia nor, so far as I am aware, in the United Kingdom where it has been held that a mere punter was carrying on a business.”

However, an organised activity to make profits out of the gambling public will normally amount to trading.

Although over time new forms of games of chance have evolved, these principles remain the same. 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. The bookmaker organising the spread bet is taxable on their profits.

The principles of Down v Compston [1937] 21TC60 and Burdge v Pyne [1968] 45TC320 ) apply equally here. 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.

A financial spread bet, if entered into by a company, will also be a contract for differences. The essence of a spread bet is that the punter wagers on either upward or downward movement in a particular index or the price of a particular subject matter. It would be unusual for a company to place such a bet – most companies are likely to be prohibited by their Memorandum and Articles of Association from out-and-out gambling – but if it does so, the fact that the contract may represent a wager does not of itself mean that Schedule 26 does not apply.

The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade.

The case of Graham v Green [1925] 9TC309 concerned a man whose sole means of livelihood came from betting on horses at starting prices. Rowlatt J says at pages 313 and 314:

“Now we come to betting, pure and simple… the man who bets with the bookmaker, and that is this case. These are mere bets. Each time he puts on his money, at whatever may be the starting price. I do not think he could be said to organise his effort in the same way as a bookmaker organises his. I do not think the subject matter from his point of view is susceptible of it. In effect all he is doing is just what a man does who is a skilful player at cards, who plays every day. He plays to- day and he plays to-morrow and he plays the next day and he is skilful on each of the three days, more skilful on the whole than the people with whom he plays, and he wins. But I do not think that you can find, in his case, any conception arising in which his individual operations can be said to be merged in the way that particular operations are merged in the conception of a trade. I think all you can say of that man … is that he is addicted to betting. It is extremely difficult to express, but it seems to me that people would say he is addicted to betting, and could not say that his vocation is betting. The subject is involved in great difficulty of language, which I think represents great difficulty of thought. There is no tax on a habit. I do not think “habitual” or even “systematic” fully describes what is essential in the phrase “`trade, adventure, profession or vocation”.’

This shows that having expertise or being systematic (‘studying form’) is not enough to create a trade of being a ‘professional gambler’.

Some ‘professional gamblers’ do carry on a trade, for example, where they receive appearance money for appearing on television programmes. They are providing a service to a customer (the television production company) for reward. Whether their gambling winnings are proceeds of that trade would depend upon the facts.

USA: Where the US is concerned, the situation regarding much of the financial spread betting marketplace is that US citizens are generally unable to participate, as they legally can’t trade financial derivatives outside the USA. Spread betting is regarded as internet gambling in the USA, and internet gambling is illegal in that country. In terms of the tax treatment of winnings from legal forms of gambling in the USA, the position is that all winnings are regarded as taxable income, although losses and expenses may be accepted as deductions, up to the level of winnings disclosed.

Australia:  The Australian taxation approach differentiates between financial spread betting and sports spread betting. The ruling is that financial spread betting calls for a degree of skill in predicting the movements of financial markets or indices and is therefore regarded as carrying on a business for commercial purposes and profit making. Financial spread betting, which includes predicting the movements of share and commodity prices or stock indices, is considered to be similar to other forms of trading in financial products. Profits are treated as assessable income and losses are allowed as deductions against assessable income.   Spread trading in Australia is governed by the Corporations Act, and not covered by State Gaming and Wagering laws. However, spread betting on sporting events and the like has been determined as recreational gambling, and therefore not subject to taxation legislation.

The message for those considering spread betting is to make sure you understand the income tax arrangements which apply in your own location.

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