Trading and Taxes: is Spread Betting really Tax Free?

Are you sure your spread bets are tax free?

The general assumption is that financial spread betting is tax free here in the UK (at least under the current tax laws). However, this isn’t always 100% the case. The crux of the issue seems to be the nature of your trades, as summarised here (taken from the Times)

HMRC will try to tax betting if it forms part of another trade. 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. This could happen if, for example, you were a professional stockbroker or share trader, in which case your spread-betting profits would probably be taxable.

Effectively, if spread betting is your main source of income, then this is considered trading and you will be taxed on these profits. Most spread betters should be fine, but it’s worth keeping this in mind if you’re considering moving into spread betting full time.

Is financial spread betting (be it derivatives, forex trading, whatever) gambling (hence not subject to tax), trading (hence subject to income tax) or investing (hence subject to CGT)?

Spread betting is essentially day trading with one important difference that no assets exchange hands – still if you get a market direction right you make money!

From BIM22015 “The taxpayer placing a spread bet is not normally carrying on a trade (see BIM22020 for exceptions). They are not taxable on the profits, nor do they receive relief for their losses.”

From BIM22020 “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.”

My interpretation of this is that if you do something else for a living, which makes you realise a bit of cash could be made from a certain spread bet, it’s not a trade. But if what you are doing day in day out is spread betting, then it is a trade…

In the past I thought HMRC considered it gambling whatsoever the amount of the gains but now I’m not so sure particularly if it is your main source of income. Naturally for a typical hoby spreadbetter, this is not much different than betting on sports – you win some, you lose some so HMRC didn’t like the idea of people being able to offset their gambling losses against earned income. But for the lucky few who consistently make profits, the situation is more complex and for those without a second income I think HMRC might argue that it was no longer gambling. This is only a problem for people who consistently make large amounts of money from doing it full time – particularly if you try to abuse the system by claiming the various tax benefits as they have no income (their “winnings” not being counted)?

Thus I believe that if you can show that you have a ‘real’ job or a difference source of income, they will mainly accept that. Or if you can convince HMRC that you do this only occassionally (ie I had a good three months winning run) and that you have now stopped, all these things put up obstacles.

So let’s say it is trading – particularly for very frequent transactions – certainly this isn’t investing from an outsider’s point of view.

To put it short, whilst the concept is sold as tax free I think it is dangerous to assume that it is a carte-blanche to do as much as you want and remain untouched. However, in general gambling isn’t trading, so simply wouldn’t be dealt with in the same way. The big problem for HMRC is that if they start to treat gambling as a trade, they will be hit with loss claims from the losers, and as there are more losers than winners it would become a very expensive exercise.

Is the fact that spread traders don’t have to pay tax fair? The fact is life isn’t fair. You can’t have fair because what’s fair for one man is unfair for another. Really fair would be every single person paying exactly the same tax regardless of what they earn but of course that would not be considered fair. It all started with the child allowance thingy. As soon as the prime minister claimed it to be fair it gave ammunition to the opponents. Now the latest thing is the spending review. It’s unfair for the poorest in society apparently but no one explains exactly why something is unfair compared to other sections of society (because they can’t). I read today that when I retire (as in state pension) next year my tax free allowance goes up by almost 50% from £6k to £9k. I think that’s unfair. When the young are paying for higher education why am I getting an increased tax allowance. To be fair, I think it’s unfair. This is how our tax system works. In any case generally speaking the few who pay the highest taxes do tend to benefit from tax reliefs and reductions. Attack them for being rich and the risk is they may take their wealth elsewhere.

Brilliant article back page of Telegraph Your Money section. Describes tax in terms of beer spend. Can’t find it online.

Goes like this:

10 men go out for a beer once a month.

The bill comes to £100.

They decide to split the bill in a similar way to tax bill.

First four men (poorest) pay 0
Fifth pays £1
Sixth pays £3
Seventh pays £7
Eight pays £12
Ninth pays £18
Tenth (richest) pays £59

The men are happy.

The pub owner decides to drop the price, their bill now comes to £80. What do they do to split the £20 fairly?

The publican suggests:

First four men (poorest) pay 0
Fifth goes from £1 to 0
Sixth goes from £3 to £2
Seventh goes from £7 to £5
Eight goes from £12 to £9
Ninth goes from £18 to 14
Tenth (richest) goes from £59 to £49

But the men aren’t happy….

The sixth man points out that he only saved £1 out of the £20 but the tenth man got £10. The seventh man agrees, asking why he only got £2 when tenth man got £10. The first four men were also indignant saying “we didn’t get anything at all….the new system exploits the poor!”

So the nine men surrounded the tenth man and beat him up. The next month the tenth man doesn’t show.

When it comes to paying the bill they found they didn’t have enough money between them to even pay for half the bill.

And that, the article concludes, is how our tax system works. The few who pay the highest taxes do tend to benefit from tax reliefs and reductions. Attack them for being rich and the risk is they may take their wealth elsewhere.

For those who understand, no explanation is needed. For those who do not understand, no explanation is possible.