The biggest advantage of spread betting is that all gains are tax-free.
However, the line can become blurred for those who self-certify as Professional Traders and those who rely on stock market profits for 100% of their income.
This article explains the rules for spread betting and explores the various situations.
It covers the rules on spread betting but if you are in any doubt you should contact HMRC directly.
Is spread betting taxable?
Spread betting is exempt from tax in the UK and Northern Ireland. This means that spread betting profits can be transferred from your trading account to your bank without the need to be declared to HMRC. However, losses on spread bets cannot be offset against Capital Gains Tax.
Can spread betting be taxed as Income Tax?
There is a danger that spread betting profits could be taxed as Income Tax. However, this is only if you do not have an income outside of spread betting.
If you have a form of income outside of spread betting and ISA profits then there is no danger of HMRC suddenly deciding your tax-free profits can be taxed as Income Tax.
That means you could work four hours a week as a barista in Starbucks and make £2,000,000 in spread betting and your profits would be exempt from tax.
However, if you are a Professional Trader and trading is your sole income, I would suggest that you seek expert advice on this subject.
Tax-free benefits of spread betting
There are several advantages of spread betting. The ability to trade on margin can make your money work harder – but this works both ways. Winners will see their profits magnified and losers will see their losses accelerate.
- No stamp duty
- No capital gains tax
- No income tax if you have an income outside of spread betting
Why is spread betting tax-free?
Spread betting is taxed as gambling and so this is why spread betting is tax-free.
Most retail traders lose when trading spread bets and so this is why it is likely they will remain tax-free.
If spread betting was to be taxed, then HMRC would lose money because most traders would be claiming back the tax losses!
So long as most retail traders lose when trading spread bets it does not make economic sense to tax spread bets.
You can learn more about spread betting in my walkthrough here.
The spread betting UK tax law
Spread betting is classed as a gambling activity by UK tax law. This is why all spread bet profits are tax-free and exempt from CGT.
Spread betting is a form of leverage and based on the speculation of asset exposure and prices rather than actual ownership of the assets the spread bet is derived from, and so spread bets are also exempt from Stamp Duty.
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So, do I pay any tax on spread betting?
Your tax liability is dependent on your individual circumstances.
If you have an income outside of financial spread betting, then your spread bet profits are tax-free.
However, if it is your only and main source of income, I suggest you speak to HMRC or an expert account to pay tax in an efficient way.
Professional Traders who live from their ISA and spread bet profits run the risk of having their profits backdated by HMRC as income tax.
Example of earnings from spread betting
Here is a screenshot from IG Analytics from one of my spread bet accounts.
It shows my total profit from that account in January as £15,599,68.
Trading used to be my family’s sole income. However, I now have other income sources (such as my online UK trading course) and so spread betting is completely tax-free for me.
This means that I could transfer the full £15,599.68 into my bank account with no need to declare this to HMRC.
Your next step: Read my walkthrough on how to spread bet profitably.