SPREAD BETTING FOR BEGINNERS – WHY SPREAD BETTING?
With spread betting you are not making a physical purchase or sale, so you do not incur some of the drawbacks of trading physical assets. Chief among these in the UK is the need to pay stamp duty or Capital Gains Tax on purchases and sales.
And because profits from betting are not taxed in the UK, any money you make from spread betting is yours to keep in full.
Spread betting is a form of leveraged trading, which means that you can gain exposure to a financial instrument while putting down just a proportion of the full contract value. You should always bear in mind, however, that leveraged trading can lead to rapid losses and you can lose more than your initial deposit. Please ensure you understand the risks involved.
Spread betting tax benefits
- Make a profit from financial markets without paying any tax
- Profits from spread betting are not subject to UK Capital Gains Tax or stamp duty
- Tax treatment depends on your individual circumstances and may change in the future
We must emphasise that spread betting is only tax-free under current UK tax law, which may change, and that ultimately your tax treatment will depend on your individual circumstances.
To see how tax-free trading works in detail let’s look at two different ways to gain the same exposure on Vodafone.
Say you buy 1000 Vodafone shares electronically at 225p per share. Not only will this cost you £2250 but you will also have to pay 0.5%, or £11.25, in stamp duty reserve tax. Say the price then rises to 250p per share and you decide to sell all your shares for a profit of £250. You will now be liable for UK Capital Gains Tax (if your total taxable gains for the year exceed your CGT allowance). CGT currently starts at 18% for basic rate UK taxpayers.
Now consider this transaction as a spread bet. For the equivalent exposure you would bet £10 per point on Vodafone at 225. Your initial outlay would be just your margin deposit which could be as low as £60, and you will have no stamp duty to pay. If you later close your position by selling at 250 you would make a clear profit of £250, with no CGT or other deductions.
Of course you might not make a profit, in which case there would be no deductions either way. And any losses from spread betting cannot be claimed as tax relief against other income. But remember that with a physical share trade you have to pay the stamp duty reserve tax at the outset whether your trade goes on to make a profit or not.
For further detail on the tax treatment of spread betting, and your own circumstances, you should always seek independent advice.
Other benefits of spread betting
NO COMMISSION OR FEES
Intertrader does not charge any commission or brokerage fees when you open and close trades. There are no fees for holding an account, so you can leave your account with a zero cash balance at no cost.
BULL OR BEAR
You can go long or short of any market, to profit from both rising and falling prices.
TRADE ON MARGIN
Trading on margin increases the leverage of your investment capital, as your initial outlay reflects only a proportion of your total exposure on a market. For example, if you buy 500 shares of HSBC at 500p, your total investment is £2500. The equivalent spread bet is to buy £5 per point at 500p. This gives you the same total exposure of £2500, but you only need 20% of this amount, or £500, in your Intertrader account to open the position. For professional clients the margin rate is even less, so you only need 5% of the total exposure, or £125, in your account.
RISK PROTECTION
At Intertrader we want to make sure you only take on manageable risks. You can attach a Stop Loss to any position, so your financial risk is significantly reduced, and move your stop level at any time either closer to your opening level or further away (subject to available funds on your account). Note that Stop Losses are not guaranteed and may be subject to slippage and market gaps in volatile market conditions.
Comparison with traditional stockbroking
| Traditional stock investment (UK stock held for 30 days) |
|
|---|---|
| Buy 10,000 shares | @ 140p |
| Cash outlay | £14,000 |
| Sell 10,000 shares | @ 200p |
| Gross profit | £6000 |
| Stamp duty | (£70) |
| Commission (buy/sell) | (£100) |
| Tax @ 18% | (£1080) |
| Overnight financing | NA |
| Net profit | £4750 |
| Return on Capital Employed | 34% |
| Intertrader spread bet (UK stock held for 30 days) |
|
|---|---|
| Buy £100 per point | @140.1p |
| Cash outlay (5% margin – pro client) | £700 |
| Sell £100 per point | @199.9p |
| Gross profit | £5980 |
| Stamp duty | NA |
| Commission (buy/sell) | NA |
| Tax @ 18% | NA |
| Overnight financing | (£90) |
| Net profit | £5890 |
| Return on Capital Employed | 841% |
What are the risks?
In the above example, consider that, although your initial outlay is just £700 at our standard margin percentage (for pro clients), you could lose more than this amount due to sudden adverse market movements. In an extreme scenario you could still lose your full exposure of £14,000, for example if the public company becomes insolvent and shares become worthless.
Before you apply for an account, please ensure that you familiarise yourself with the risks involved and that spread betting matches your investment objectives. You may wish to seek independent financial advice before applying for an account. If you are new to trading, we recommend that prior to applying for a live account you open an online Demo Account.
If you want to know more about the risks involved, please read our full Risk Warning.
