It’s completely legal to NEVER pay tax on trades/ investments in the UK, if you use spread bets. A fun little fact nobody knows about. If you want to know why, keep reading, and come see us in person at our open bar: https://luma.com/bartb90k?tk=lsn9uG
Let’s dig deeper
Spread bets are a popular method for British punters to bet on the outcomes of sports matches.
They agree on a price per point and an entry level, and exchange the difference between the entry and exit levels after the bet is closed. Sounds like a futures contract, right? So the spread betting industry expanded into markets on stocks, FX and commodities.
British Judges Love Gambling
Spread bets are tax-free. This is because they’re considered a form of gambling, which has been exempt from tax in the UK since Graham v Green in 1925. Judge Rowlatt decided that "a bet is merely an irrational agreement that one person should pay another person on the happening of an event". Judge Rowlatt loved a good day out at the horses.
So…
If you do any kind of investing or trading and you’re based in the UK, do it via spread bets. You can even put your long-term S&P 500 portfolio in here. Yes, really.
This is one of the most absurd regulatory arbitrages in modern finance.
Same Same, But Different
When you trade a CFD, you agree on a price per point and an entry level, and exchange the difference between your entry and exit levels when you close the position. You can trade stocks, FX and commodities. Sound familiar?
Spread bets and CFDs on financial assets are in fact functionally identical:
>Leverage: Both offer the same leverage ratios.
>Underlying exposure: Both track the same assets.
>Risk profile: Both can lose you more than your initial deposit.
>Opaque overnight charges and FX conversion costs: Both charge obscene hidden fees.
However, trades on CFDs are considered financial investments, and carry tax liability; you pay capital gains tax on money you make.
You read that correctly. The UK government decided that speculating on Apple's stock price through a spread bet is gambling (tax-free), but doing the exact same thing through a CFD is investing (taxable).
Brokers Love HMRC
Brokers absolutely love this system, because it lets them raise their fees on spread bets.
Brokers also usually offer spread bets on the underlier, and charge a daily fee to hold the position, or a fee-free bet on a future. The futures bet is always cheaper to hold for long periods, but is usually hidden away in the UI. Meanwhile, all but the power users pay more in costs.
Even traders that know about the tax arb between the two products lose out. They are prepared to pay more for a spread bet than a CFD on the same instrument, because a spread bet is still cheaper than a taxable CFD. And if traders are prepared to pay more, brokers will charge accordingly.
Offering financial markets on both spread bets and CFDs also fragments liquidity, which leads to wider spreads for all concerned. See my take on exchangification.
Who’s the Smart One?
This loophole only exists in the UK and Ireland. Everywhere else, regulators correctly identified that spread betting and CFDs are the same product, and tax them identically.
Spread bets or CFDs? Neither
Spread betting exists because a random judge decided that bets were not investments. Spread bets are definitively a tax-free CFD.
When you have two identical products such as these with different tax treatments, you create artificial demand for the "tax-free" version. This lets brokers charge wider spreads on spread bets because customers will pay extra for the tax benefit.
The future belongs to transparent, exchange-traded instruments that don't rely on regulatory loopholes for their value proposition. This change is going to come sooner than you think.
Until then, enjoy the high cost and tax-free gambling on Apple stock.