Spread Betting Gains Tax

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Spread Betting Gains Tax
You are here: Home > Trading FAQs > Is spread betting tax free if its your sole source of income?
I know that the spread betting companies say that it is a tax free product because it is classed as betting rather than trading, but do you have any knowledge of the tax mans view on spread betting for a living as a sole source of income? I won’t be using the leveraged side of spread betting, it’s just the tax free part that sounds good to me. I like the idea of not having to pay tax, but it just seems too easy.
I think that it is pretty clear that someone who pays tax on another income source will never have a problem if they make money via spread betting. The crux of the matter really relates to an individual who makes their sole income through spread betting.
‘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.’
The way I understand it is that there is no tax on spread betting winnings. That means no tax on gains, but also means you cannot offset your spreadbetting losses, unlike ‘normal’ share/bond trading or CFDs.
Of course, the Inland Revenue (HMRC) has the power to look at tax payers’ circumstances at an individual level if they are of the opinion that someone’s circumstances are unique or rare. In this respect I have little doubt that HMRC could deem a very successful spreadbetter as being ‘rare’ if it thought that it would help their case.
Having said that, I’m confident that the case of any possible Inland Revenue investigation against the ‘professional gambler’ would rest largely on the ethical principle; that persons conducting themselves in such a way by which they gain an income which they make a living on and should thereby be obliged to pay income tax on that money. This in practice means that some tax inspectors might provide advice which is 100% mechanical in nature where another may well introduce an element of ‘ethical principle’ (i.e. is it fair that someone might earn (win) £100k and not pay a penny in tax)?
Let’s assume that you earned £50, at the weekend, stacking shelves in Tesco but, traded 12 hours a day during the normal working week. Your profits, from trading, amounted to approximately £5,000 per week and you made 10 trades each day; what would HMRC consider to be your primary occupation and income source?
The shelf stacking in Tesco’s? Unlikely, I think…
“Try giving HMRC a call and see whether you ever get a clear-cut reply. I mean, you’re hardly likely to get a nice honest person at the IR saying all perky down the phone ‘yes sir that’s correct, go and make as much money as you can and you wont owe us a penny! Good luck sir!!!'”
Although I can understand both facets of the argument I’m not sure that the ethical standard could be used in a case which went as far as court. So long as the person in question could show that he / she was following the law then they wouldn’t have a case to answer. As far as I know there is nothing in law which states that someone must ‘pay’ income tax – instead the law requires that someone is ‘assessed’ for income tax – an assessment doesn’t mean that liability is always found.
You see there’s an absolute exemption from CGT and Stamp duty, but it is a potentially grey area where income is concerned. If spread betting profits constitute subsistence income, then it could be an issue. No clear cut answer. HMRC contains the same number of unambitious clock watchers as any other government department (that is when they are not on the sick) and most tax offices will be unable to give a sensible answer. You would probably need to be subject to an investigation before your status could be sensibly considered.
Having seen part of the rules regarding spread betting posted in a discussion board and they are cryptic, very cryptic. They are open to interpretation, deliberately so in my opinion. In my own experience government departments (DVLA, Inland Revenue etc) tend to overstate their powers and also make up their own ‘rules’ as they go along. It is up to the tax inspector to interpret these regulations and make a ruling on your tax position.I’m sure that many people wilt under pressure and just play ball but sometimes it is good to challenge them. The problem is that the only way to do that is to refuse to pay any tax! You can see the problem – it would be good if there were a couple of high profile cases which went to court.
Anyway, it seems the consensus seems to be that spread betting gains are tax free and in most cases you won’t ever be confronted by the Inland Revenue about not declaring it and frankly if you are confronted you probably stand a good chance of winning due to a little thing called ‘law’. Secondly, if the Inland Revenue were to starting considering gamblers for taxation via Income Tax then they’d have no option but to offer relief on losses. Since there is nothing to stop people having more than one business or trade anyone who gambled would thus be able to deduct losses (from gambling) from their taxable income. This would cost the Inland Revenue a fortune.
Having said that apparently no one has ever been convicted of not paying tax from spread betting earnings. Big companies such as IG Index pay huge amounts of corporation tax which may help to explain why this is the case. In Las Vegas (complete aside I know) they pay just 8% tax total as all the big casinos pay Federal and State taxes hence it’s the fastest growing state in the USA! Apart from anything else, as the majority of spreadbetters lose, HMRC will find raking in tax from the providers much more worthwhile (and easier) than chasing around after the few people who actually manage to make a sizeable profit.
In any case my advice is to stay under the radar and don’t say anything unless the Inland Revenue presses you. Which means it is a good practice to keep all paperwork in case you’re ever challenged by them. And maybe speak to a recommended tax adviser in the meantime to put the full stop on it.
Is it a requirement to mention spread betting on the tax returns even if it tax free?
There is no requirement to show spread betting ‘earnings’ on a return. Such a return would be incorrect. I have never come across a return which clearly shown spread betting earnings, but if one was received it would probably be processed normally since the term would probably mean little to those who do the processing, hence it is unlikely that it would be picked up for formal inquiry on this reason alone. The fact that a return has been processed does not imply any agreement on HMRC’s part.
You can present the full facts to HMRC in a letter and receive a written ruling by which they would be bound, if you have particular concerns. Or you could pay your ‘accountant/tax consultant who specialises in these things’ to do this on your behalf.
In any case if you are serious about this, seek advice from a competent and qualified professional.
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A: The simple answer is yes. Spread betters escape the 18 per cent capital gains tax that shareholders must pay on trading profits (capital gains amounts to the difference between what you pay for an investment and what you eventually sell it for). There is also no stamp duty and no commission on each trade apart from the spread. Not having to pay capital gains tax is a great advantage as it means that you can factor an additional 18% return on your trading profits since you will be saving monies that would have otherwise gone to the tax man. Moreover, with spread betting there is no income tax on dividends; which is levied at rates as high as 50% for high income earners.
However it is important to point out that spread betting may only be tax free if it is not your main source of income. For that reason it is probably not wise when opening a spread betting account to put your job description down as 'day trader' or 'trader' as it would then be rather difficult to claim at a later date that trading was not your main income if the Inland Revenue was to query where you made your money!!!
I actually spent ruddy ages trying to establish the position of spread betting with the revenue, and in the end it was pretty clear - perhaps this will ring true with those who have investigated this with the revenue themselves? If you have a 'subsistence income' (i.e. enough to live off) from an independent source that you pay tax on, then HMRC can't tax you on your spreadbetting activities. It's only if you have no other source of income and you use it for your primary income source that the tax advantages may disappear. Spoke to the revenue office in Nottingham with a technician there, who specialize in people who make a living from gambling, so I guess he knows his stuff. He deals with people playing the horses, dogs, poker, even casino games (!).
The bottom line is that if you are a tax payer who wins at spread betting (or any other forms of gambling for that matter!) you should not be liable for tax on winnings. If you do not have any other regular taxable income other than gambling you will probably be classified as a professional gambler (your trade) and may loose your BIM22017 exemption. In any case if you are employed and pay PAYE you cannot be classed as a professional gambler and so do not need to pay tax on gambling winnings even if they exceed your employed income. The reason HMRC are reluctant ot classify anyone as professional is that a professional gambler could then claim relief against losses from gambling and against the spreadbet companies proportion of their gambling tax.
The vast majority who spreadbet, I would opine, do not do it for a living, and therefore they are completely safe from taxation. Those who do it for a living have enough cash to hire clever accountants who sort it all out for them. Nothing to stop a millionaire trader having a self-employed 'subsistence income' from a bit of consultancy work that he pays tax on. The revenue can challenge it, but due to the nature of current legislation, they're unlikely to win. Thing I discovered after starting work in the Financial Services industry is that tax law is much more open to interpretation than I ever imagined beforehand!
That said, I have never heard of anyone being taxed on spread betting but then people probably don't advertise the fact.
A: Spreadbets are treated differently to contracts for difference. The providers that offer spread betting pay betting duty direct to the HM Revenue & Customs, so the bid-offer spreads tend to be slightly higher to cover the tax. From 6 October 2001 there has been a 3% general betting duty charge on the financial spreadbet company's net stake receipts (that is, the total of all bets received, less any winnings paid out). As such the taxman will treat any gains from spread betting activities as tax-free but this also means that losses cannot be claimed against other income.
Contracts for difference on the other hand have a lower spread and providers to not pay betting duty. But this also means that any realised profits are subject to CGT and therefore exempt from tax on about the first 9k. There is also a risk that if you are professional CFD traders the tax man might argue the point that profits are subject to income tax rather than CGT in this instance.
This is just a basic guidance, seek a specialised accounting firm for advice.
A: With the advent of the internet, many bookies set up offshore offices so that they did not have to pay UK taxes, and also the punter did not have to pay a 9% tax upfront on the bets they made, and the government was losing a lot of tax on the profits of the bookmakers. So in about 2001 - 2002 I believe, tax on winnings was abolished. By scrapping the tax on winnings many more people were encouraged to gamble, and the government was able to collect tax on profits made by the bookmakers, and as it is a fact that more people lose than win, whether that's on spreadbetting or any kind of gambling they collect more this way than taxing the punter, and as has been pointed out, most traders are part time, and the majority lose money, so this could be offset against tax on earnings.
For many reasons I believe the government will not remove the tax free status on spread betting (the most obvious being the immediate loss of the 3pc gaming duty on client losses). More clients lose than win in reality only a percentage make any significant gains (and there is still the CGT threshhold to get over as well) so the tax man would lose on 3pc of clients losses and only gain marginal monies from CGT on the winners. Not only this but the losers would be able to offset their losses again CGT liabilities elsewhere.
To conclude I believe and hope things carry on as they are, I hate giving money to the Chancellor.
A: Stamp duty is a tax applied to UK share purchases only (not sales). The current rate on UK equities is 0.5% of the amount paid to purchase the shares (excluding broker commissions..etc). The stamp duty rate in Ireland is 1%.
Spread bets are exempt from the 0.5 per cent stamp duty applicable on UK share purchases which means that short to medium term holdings may work out cheaper than buying the underlying shares. For instance IG Index charges LIBOR plus 2.5 per cent on long spread betting positions held overnight. Thus, assuming an overnight rate of 0.55 per cent the applicable charge would equate to 3.05 per cent per annum. In these circumstances it would take 60 calendar days for the accumulated financing charge to exceed the stamp duty saving.
Note: For trading of international shares the 0.5% stamp duty on share purchases doesn't apply, although markets like Hong Kong and Singapore have their own comparable taxes.
A: Capital Gains Tax does not apply in Ireland either so gains from spread betting in Eire are also tax-free. My understanding is that under current legislation places like Wales and Australia are also free of capital gains tax.
A: The reason is to raise money for the government and no you can't claim it back! The stamp duty is an additional tax as well as your expenditure (VAT) and various other things (Council Tax, Vehicle Excise Duty etc...). Likewise, Capital Gains Tax (CGT) is payable on disposal of an asset. Changes to the CGT regime in the 2010 emergency budget saw the capital gains tax rate increased when income and gains take you into the higher rate tax bracket, from 18% to 28% (remaining at 18% for any portion remaining in the basic rate band). The annual allowance of £10,100 (2010/11) still remains. If you don't want to pay Stamp Duty use CFDs or spread bets to buy shares or invest in the USA... Spread betting gains are also not subject to Capital Gains Tax.
Note that aside from Ireland and the UK, Switzerland and Greece also charge stamp on equity transactions.
A: My understanding:
You will need to report for investment income and capital gains tax purposes in the UK, assuming you are liable to these taxes (UK resident...etc), just as you would for UK stocks. Whether you need to report capital gains depends on the amount of the gain (i.e. over the annual allowance) OR the total sales proceeds in the tax year (over a set limit - regardless whether you made a gain or not).
You can claim a deduction against UK tax for US withholding tax and the commissions paid. I am not 100% sure but I believe you have to use the exchange rates prevalent on the transaction dates. You are theoretically liable for any currency gains.
The HRMC website has booklets covering most of this.
You will need to keep records to help complete your UK tax return. Unfortunately, the tax summary you get from the US broker will be of no use given they start and end their tax years differently to the UK. However, no issue as firms like E*Trade US have far better on-line systems than the UK ones I've seen. You will be asked to complete a W8 IRS form by your broker (not difficult) so they have evidence you are not a US resident.
Spread betting removes all this hassle (no reporting, currency moves, etc). However, it is not suited to allow investors.
A: It might be best if you consulted a specialised accounting firm on these matters...but from the bottom of my head (and I cannot guarantee that these statements are correct) -:
'But wondered would happen if I decide to do the spread betting full-time and quit my job?'
First, be warned that making a living from spread betting (like any gambling for that matter) is a high risk venture and you might want to consider having a back-up plan to fall back on. I would strongly urge anyone against using his life savings to spread bet with. In fact it might be wise to setup a betting bank for the spread betting to avoid mixing living costs and requirements from gambling results as no matter how successful you might turn out to be - it will still be a roller-coaster as far as profits and losses go.
Would I need to declare myself self-employed?
No, you wouldn't as personal gambling profits are outside the taxation system. However, having said this you might want to consider setting up in some sort of self-employed capacity to produce some stability in earnings in which case you would register.
Would I need to fill in a self-assessment form each year (even if it is free from any taxation)?
Hand it in to the job centre when you register as unemployed. Or a new employer if you went part-time. If you have no job and you aren't registered as self-employed then you would not be paying national insurance but you shouild still pay at least a little amount each financial year to mantain your full pension entitlement.
Also, if I choose to be self-employed (as well as doing spread betting) would I need to declare my winnings with HMRC i.e. would they have concerns with someone only declaring a small amount of (self-employed) income for taxation?
You might want to keep reasonable records of self-employed income and your spread betting activities (statements, bank transfers to and from your spread betting company...etc) so that should your luxury lifestyle exceed your self employed earnings you could show reasonable information on how it was achieved from outside the tax system.
A: I don't believe there should be any liability National Insurance. The starting point for the computation of the Class 4 NICs liabilityis the gain resulting from a trade which is chargeable to income tax under Chapter 2 of Part 2 of ITTOIA 2005. Gambling/spread betting does not fall under 'trading income' and there should be no National Insurance liability.
A: I am based in the UK and have asked the same question of my accountant. My current situation is such that I do some part-time work through my own consultancy ltd company (which pays income tax). Her answer was along the lines that as long as I was registered with the I.R. as self employed and did 'some' work each year then no tax is due on spread betting gains. I have trawled the governments website for info and test cases but they are very vague and coul
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