The factual reason spread betting is tax-free for profits is because the trades are structured as a bet. i.e. I bet you £10 for every point the FTSE goes up etc.
Therefore it is structured as a bet and as with all gambling, exempt from capital gains tax.
However, the actual reason (according to old City anecdotes anyway) may be slightly more sinister.
Rumour has it that back when spread betting was in its heyday and the big firms were in their infancy the Government got their knickers in a twist about this supposed loophole in the tax law allowing investors to keep all their profits.
The treasury was not happy and in order to claim their pound of flesh sent the bespectacled flat foots round to visit the big spread betting firms for a bit of an audit.
However, they, of course, discovered that most punters don’t make money and that spread betting firms as with bookies largely profit from the losses clients make on their account.
There are well-publicised accounts as well as plenty of conjecture that around 80% to 90% of traders who spread bet lose money.
What that means is that firstly there weren’t actually that many profits to tax, but secondly that if they did included spread betting in the capital gains calculation all these losses could be offset against profits made in normal investment accounts.
So, there you have it. Spread betting is really tax-free because it would probably cost the government more in capital gain loss offsets than they were to receive in taxable profits. That’s actually one of the benefits of CFD trading. If you are hopeless at it at least you can offset it against your long-term low-risk investments.
But then that should be the case really for any sensible investment portfolio. 90% should be in sensible low to medium risk asset classes. And if you want to play the markets, 10% (at most) should be allocated to high-risk self-directed trading.
It’s classic high-risk investment hijinks really and makes an already leveraged product even more high risky.
What I mean is that if you are bad at spread betting you can’t even offset your losses, so you’re stuffed both ways.
But, if you’re are good at spread betting and make money, you’re laughing as not only have you beaten the market (AKA living the dream). You also get to keep all your winnings…
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Richard started the Good Broker Guide in 2015 and has been a broker for 20 years most recently at Investors Intelligence and previously a multi-asset derivatives broker at MF Global (Man Financial). Richard started his career working as a private client stockbroker at Walker Crips and Phillip Securities (now King and Shaxson) after interning on the NYMEX oil trading floor in New York and London IPE in 2001 & 2000.