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What are the tax implications of spread betting?

What are the tax implications of spread betting?
Asked by
Benjamin Schmitz categorie-icon time-icon5 months ago
1 Answer Answer Question

Justin Freeman
Answered time-icon5 months ago

Spread betting offers traders the chance to gain exposure to thousands of different markets.

There are also some quirks specific to this type of trading that mean that transactions and any profits made incur less tax than other types of trading in the same market. These typically relate to UK citizens/residents and you’d need to look at your own situation in detail but there are some general trends that go some of the way to explaining the popularity of spread betting.

It is important to mark from the outset that the advantages of spread betting only apply if it is not your main source of income. If it is you are liable to be classified as a professional gambler.

Stamp duty, or to give the full title: Stamp Duty Reserve Tax is a tax levied at time of purchase of ordinary UK equities. The rate of the tax is 0.5% of the cash consideration of the transaction and you may be most familiar with this if you have bought shares in a buy and hold style at a stockbroker. There is no SDRT on the sale of shares.

Calculating the cost-benefit of trading in the actual equity or in spread bet form will involve calculating the costs associated with holding the position. Whilst there is the opportunity cost of funds foregone, the actual financing costs associated with buy and hold equities are generally seen to be lower than the costs of holding a position as a spread bet. For this reason, some traders looking to enter into and out of short-term positions may look at using spread bets as a way of carrying out their strategy. Those looking to hold the position for longer may hold the actual equity.

Capital Gains Tax is another tax that does not apply to spread betting transactions. Buying and then selling ordinary equities is, like other assets, liable to capital gains tax. The rate in the UK can vary depending on your personal circumstances and there is an annual allowance below which the tax does not apply. Traders that are hopeful of large gains may though opt to trade using spread bets.

The possible tax efficiencies could be nice to have but shouldn’t detract you from working on developing and applying a well thought out and risk-aware strategy.

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