Why Is Spread Betting Tax-Free in the UK?

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Written by Justin Grossbard

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Spread betting in the UK is classed as a speculative bet rather than an investment by the HMRC, which makes the winnings generated on spread betting exempt from capital gains tax. The product is also a derivative, meaning you never receive an asset exempting you from the stamp duty tax usually paid on purchasing shares and other assets. This makes spread betting an attractive method of speculating on the financial markets for its tax-exemption benefits.

What Is Spread Betting?

Spread betting is a method of trading the markets that allows you to speculate on the price movement of a financial market without owning the underlying asset. It allows you to profit from rising and falling markets by going long (to buy) or short (to sell) the market, making it an attractive financial instrument for day trading.

an overview of spread betting

What Are The UK Spread Betting Tax Benefits?

If you are a trader of financial products in the UK, you might find spread betting attractive since it is a tax-free alternative to other financial derivatives like CFD trading. Below, I’ve highlighted the key spread betting tax benefits:

1. No Capital Gains Tax

There are no capital gains taxes to concern yourself with when spread betting. Your profits are exempt from CGT, so you can keep all your spread betting profits. This alone can save you up to 20% in trading costs per year on your profits.

2. No Stamp Duty

You do not hold the underlying asset because spread betting is a derivative product. Therefore, you do not pay stamp duty tax, reducing your trading costs over time (currently 0.5% per purchase).

3. Commission-Free Trading

Apart from not paying taxes, you do not have to pay commission fees. This no-commission spread betting works by factoring in the cost of opening your trade into the spread. A spread is the difference between the buy and sell price, so if the buy price of EUR/USD is 1.0604 and the sell price is 1.0605, the spread will be one pip.

There are, however, a couple of exemptions to the no-tax rule to be aware of:

  • If you spread bet professionally, and it is your only source of income, then you will be subject to income tax.
  • If you have opened a limited company and trade through the company, then the HMRC considers this a trading activity of the company. Therefore, it becomes taxable on profits through corporation tax.

spread betting tax

Pro and Cons Table For Spread Betting Taxes

In general, there are many spread betting advantages, including leverage trading, a wide variety of markets to bet on, and low trading fees. However, one of the main benefits is the exemption of capital gains and stamp duty tax.

Pros Cons
Do not pay capital gains tax Cannot offset your losses against your tax
Do not pay stamp duty tax If spread betting is your sole income, you may be charged income tax
Do not pay dividend tax  

Although these are benefits, you should also consider the cons of tax-free spread betting – especially if you are a professional spread bettor or spread betting is your sole income.

pros and cons of spread betting

How Are CFDs And Spread Bets Taxed In The UK?

Spread betting and CFDs are very similar, yet they differ in how each is taxed. The reason is that CFDs are not defined as gambling since there is the exchange of a contract. Below is a table I put together to show the differences in how they are taxed:

Tax Type Spread Betting Share Trading
Capital Gains Tax (CGT) 0% 10 - 20%* on profits
Claim Losses Against CGT 0% Yes
Stamp Duty 0% 0.5%
Dividend Tax 0% 8.75 – 39.35%*
*Subject to income tax band.

Why In The UK Not Tax Spread Betting?

The UK is one of the only countries worldwide not to tax financial spread betting, and that is due to how the product is structured and classified by the HMRC, which regulates spread betting taxes.

The HRMC Considers It Gambling

According to the HMRC tax law, and it states that because there are “no assets [are] acquired or disposed of”, spread betting is exempt from capital gains tax. It considers that spread betting, you are gambling on the future direction of prices, compared with other assets you are buying and selling financial products like futures, options, and trading CFDs.

The HRMC Considers It A Derivative

Derivatives do not involve a purchase (or receive) of an asset when issued; therefore, the HMRC declares spread betting exempt from stamp duty liability. This means you do not have to pay 0.5% stamp duty tax when you purchase a spread bet on any market like you would do with traditional share trading.

Spread Bet Tax-Free Example: Stocks

Below, I’ll demonstrate a spread betting example highlighting the tax benefits compared to traditional market speculations.

Example of Spread Betting Stocks (Tax-Free):

You do not pay any stamp duty because you are spread betting and not receiving a contract or shares to own, and you’ll only pay a spread to execute the bet.

You purchase VOD shares at the buy price of 82p per share with a bet size of £10 per point, meaning you will make £10 for every 1p VOD rises above 82p.

The prediction you made is accurate, and VOD rises to 92p per share, rising 10p (or 10-points), which makes you £100 profit (10-point price move x £10 bet size per point).

Because you used a spread bet, you do not have to pay capital gains tax.

If you chose to trade the shares traditionally, you would have had to pay:

Fees on purchasing shares:

  • Stamp duty tax (0.5% of the asset value)
  • Broker’s commission (typically 1.5% of the total trade size)

Fees on closing the shares in a profit:

  • Broker’s commission (typically 1.5% of the total trade size)
  • Profits liable to capital gains tax (up to 20% of the profits)

As you can see, spread betting has much lower overall trading fees than traditional trading forms.

FAQ

Which Countries Is Spread Betting Tax-Free?

Only the United Kingdom offers spread betting as tax-free as it is seen as a gambling product instead of an investment vehicle, making its winnings exempt from capital gains tax.

What Are The Costs Involved In Spread Betting?

Spread betting is one of the best methods of speculating on the financial markets with its low trading costs. You will only have to pay a low spread (from 0.5 pips on some brokers) if you close your position on the same day (before 22:00 UK time). If you choose to keep the position open during this time, the spread betting broker charges a rollover fee (interest charges on the amount you have as leverage) each night until the position is closed.

You can use a spread betting calculator to find the costs involved with your spread bet before you enter the financial market. This can give you a better outlook on trading costs to see if the risk-reward is acceptable.

Are Taxes The Same For Shares Trading And Spread Betting?

No, traditional share trading has stamp duty and capital gains tax because you purchase a company’s physical shares and receive a certificate of ownership. On the other hand, spread betting shares are exempt from paying capital gains and stamp duty because they are derivatives, and you do not physically receive any ownership of the shares.

Is Spread Betting Illegal?

Spread betting is not illegal and is available as a method of trading for many countries; however, in the UK, it is more popular due to its tax exemption status. Financial spread betting is illegal in some countries like the United States.

About the author:

Justin Grossbard

Having traded since 1998, Justin is the CEO and Co-Founded Spread-Bet.co.uk in 2004. Justin has published over 100 finance articles from Forbes, Kiplinger to Finance Magnates. He has a Masters and Commerce degree and has an active role in the fintech community. He has also published a book in 2023 on on investing and trading.

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