Spread Betting Taxation
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Spread Betting Taxation
You are here: Home » Trade Spreads » Trading and Taxes: is Spread Betting really Tax Free?
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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.
10 men go out for a beer once a month.
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 pub owner decides to drop the price, their bill now comes to £80. What do they do to split the £20 fairly?
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
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.
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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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The United Kingdom is known for its relaxed attitude towards betting, especially in terms of betting and gambling. Though tax is paid , it is done so by the companies that provide betting platforms as opposed to the people winning money through their wagers. This results in some people in the UK treating gambling more like a profession than a pastime, including in areas of the industry such as spread betting .
Some people that get involved in spread betting do so as their sole source of income, meaning that it is no longer classed as gambling by the government and is instead seen as trading. If you’re a trader then you need to pay tax on things that other people don’t, resulting in a loss of earnings. If, however, you have a subsistence that is enough to live off from a different trade then you won’t pay tax on spread betting.
Spread betting is a somewhat complicated process, with countless sites online going into a lot of detail explaining what it’s all about. We’re not going to do that on this page for the simple reason that it’s a topic in and of itself, so instead we’ll offer a brief and relatively simplistic explanation of what spread betting actually is. For those that know about it in-depth, the key words there are ‘brief’ and ‘simplistic’.
Spread betting is thought of as being a derivative strategy, in which spread bettors are essentially speculating on the future price of an asset like a the number of goals in a game. Much as with the world of stock markets, there is a price that you can buy at and the price that you can sell at, with the difference between the two being what is known as the spread. The invention of spread betting is widely credited to Charles K. McNeil.
He was a teacher of mathematics who went on to become a securities analyst and eventually a bookmaker, so it’s fair to say that it has always had ties to the world of sports. Spread betting isn’t just on sports, of course, but it can be. As mentioned, it’s a complex world and one that you really shouldn’t look to enter into unless you have some idea what you’re doing, given that there are risks involved .
In spread betting you take a ‘position’ on a market and the more accurate your position is the more you can win, the less accurate it is the more you can lose. Unlike fixed odds betting you can end up in a position with spread betting where you lose more money than you have in your account, meaning you can end up owing the company money beyond what you initially deposited.
If spread betting is something that you get involved in on the side of your main job then you will not have to pay any tax on the profit that you make. That’s because it is considered to be a form of gambling and is therefore not liable for tax in the same way that other profits are. Instead, it fits into the tax laws around betting and gambling, which state that it is a tax free activity regardless of how much money you make from it.
The key point there, though, is that the spread betting is not your main job or source of income. If you don’t earn money on anything except for spread betting then things change and you’ll become liable to pay money on your earnings. If you pay tax on an income that is enough to live on then you won’t pay tax on your spread betting earnings, but if you don’t then you will. It pretty much is that simple.
Her Majesty’s Revenue and Customs are extremely reluctant to see anyone classed as a professional gambler for the main reason that if they do so then that person could claim relief against their losses. In other words, it’s unlikely that HMRC will work hard to prove that you’re earning your sole living from being a spread bet trader, but it can happen if you don’t do things correctly when it comes to your tax returns and so on.
As with other forms of gambling, the fact that most spread bettors don’t pay tax on their winnings doesn’t mean that Her Majesty’s Revenue and Customs department doesn’t earn any from it as an activity. Companies that provide others with the ability to engage in spread betting pay a betting duty directly to HMRC, which is reflected in the bid-offer usually being slightly higher in order to cover that amount.
There’s also a reality to acknowledge when it comes to spread betting, which is that the number of people who make a loss far outweigh those that make a profit from it. That means that there is only a marginal gain to be had, if any gain at all, from a decision to more actively tax those that get involved in spread betting. Money is currently made from it, with the amount unlikely to change significantly if how it’s taxed was altered.
As things currently stand, spread betting is free from Capital Gains Tax and Stamp Duty in the United Kingdom for the vast majority of people who engage in it as an activity. The key thing to keep coming back to, though, is that the majority of people will have another source of income other than their spread betting profits. If you don’t then it’s entirely possible that your situation will change and you’ll be taxed on your earnings.
Here’s what is said on the HMRC website about the matter:
“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.”
If you’re at all concerned then you can contact the revenue service and ask them for a ruling, which they would then be bound by. In essence, though, you have no need to mention spread bett
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