Is Spread Betting tax free? The reasons why.
Is Spread Betting tax free? In this article, we’ll be explaining everything you need to know about Spread Betting and why you should consider it as a trading practice!
Following on from last week’s introductory article on swing trading (which can be found here in case you missed it!), today’s article centers on a rather grey area of trading; the practice known as spread betting.
Is it even trading? How does it work? We’ll answer all that soon, but the main thing you need to know is that spread betting is absolutely TAX-FREE and when done correctly, can reap some serious rewards!
Now I know you’re probably very excited at the thought of not having to pay ANY tax on your trades. But before we get into this, let’s actually get into the meat and bones of what Spread betting is and how it works;
What is Spread Betting?
Spread betting is a type of trading where the trader can ‘bet’ that the price will move in a certain direction, however, the price will not be influenced by the trade.
Spread betting allows you to go Long (price goes up) or you can Short, which is to bet the price goes down.
The betting aspect of spread betting is the fact that each trade you initiate has a defined expiry date. The expiry date can range anywhere between a few days and a number of years, so carefully choose which bet you mean to place!
Is Spread Betting tax free? (the part you’re all interested in)
Spread betting is tax free because it’s classified (by law) as gambling because the trader does not influence the price when they place a bet. If you compare this to the likes of a share dealing or ISA account, you’d find that placing an order reflects in the price.
To further clarify what aspect of it is tax free – Spread Betting is exempt to both Capital Gains Tax and Stamp Duty, making it advantageous over other investment/trading types.
Why you should Spread bet rather than use CFD
There’s no capital gains tax! So you can trade until your heart’s content, knowing that every penny you make, is yours!
Zero % commission! Although there isn’t commission on the trades that you make, you do have to bear in mind that you pay a little extra in the ‘Spread’ (the difference between the bid and ask price).
While there is an attached ‘spread’ for both CFD and Spread Betting, they are both very comparable, and in some instances, we’ve seen certain CFD brokers increase the spread to around 5% on volatile stocks!
You don’t own the stock with either CFD or Spread Betting, so why pay tax, when you don’t need to?!
Things to be careful of
Using leverage – leverage is where you essentially borrow money that isn’t yours to trade with. A common amount of leverage is 1:5, which means that for every £1 you put in, you can trade with **an additional** £5. We strongly recommend you familiarise yourself with the basics here.
DO NOT start trading with more than you can afford to lose. If you can’t afford to lose £1000 of your own money, then do not even consider investing or trading with £1000 of your own money… or anyone else’s for that matter!
Always check the spread between the bid and ask price. The larger the spread, the more money you’re losing before you even place the trade, so keep it small! You’ll also notice that when the stock is volatile, this spread WILL increase.
Check the bet expiry! Most spread bets have a very long life time, up to 9 years in some cases, but this does not apply to all bets!
So here you have the foundations and facts laid out for Spread Betting.
Let us know in the comments your experiences with spread betting, if you’ve had much success, or even if you think it’s a waste of time. This article is part of our investments series, so if you’re interested in expanding your trading knowledge, check back in with us regularly for more guides and resources!