Contracts for Difference

CFDs or Spread Betting: Tax Implications

If you make 100s of trades a year, the extra spread you pay with spreadbets will likely come out more than the tax you save.

In the past there used to be bigger tax advantages to spread betting. But these days you get a 10K tax free Capital Gains Tax allowance (+ another 10K if you have joint account with your spouse) and then its only 28% after that. So there really isn’t that much of a tax incentive to go the spread betting route if you bet reasonably often (the extra spreads imposed over a year’s of betting add up and eat into most if not all the 28% tax saved).

Thus, I think that today the tax-free advantaged status of  financial spread betting isn’t as great as it used to be when you compare it to direct access with x number of trades. With a spouse’s Capital Gains Tax allowance added to yours, you can make 20K on direct access before you pay Capital Gains Tax at 28%. Compare that to the spreads you pay over a year and direct may be a better route to go down.

What About Stamp Duty?

Active traders find that stamp duty can take a big chunk out of their profits. Using a spread betting or CFD account is one of several ways they can eliminate this extra cost.   In the UK, spreadbetting is regarded as gambling as opposed to trading and therefore is not subject to tax which means there is no tax on gains, but it also means that you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading.  I suspect this arrangement suits the Revenue for good reason.

So should I go with Spread Bets or CFDs?

When starting out, spread betting is a sensible way to go.  With the gambling/trading tax laws (e.g. no tax versus 0.5% stamp duty on shares (which is sickening), it is in everyone’s interest to have a spread betting division which is then at least partially hedged. Even high street banks have spread betting divisions. I have had no problems at all with that.  Later on, it’s probably worth moving onto DMA CFDs (which again are trivial to short), but you probably need £30k+ to make it worthwhile.  Until then it is probably cheaper/easier to just pay the spread.

(copyrighted to Andy Richardson July 29, 2010)