Captial Gains Tax rate on CFD trading when you have no income

It is buried in various Tax updates, your accountant should be able to find it, but the goal posts are moving all the time, see below. But the main point is if you are employed and spread bet for fun then you are OK, but if it is your main source of income you may not be depending on who you talk to.

HMRC internal manual
Business Income Manual
From:
HM Revenue & Customs
Published:
22 November 2013
Updated:
2 May 2019, see all updates
Meaning of trade: exceptions and alternatives: betting and gambling - spread betting
The principles of Down v Compston [1937] 21TC60 and Burdge v Pyne [1968] 45TC320 (see BIM22019) apply equally to spread betting. To be taxable, the spread betting wins must come not merely from an opportunity presented by a trade, they must arise from the carrying on of that trade. Whether or not a particular spread bet is taxable will depend on the terms of the contract and the economic substance of what is done.
 
Well that always the issue, reading between the lines, I would say "making a living" from your trading would be the economic substance.
 
Parky said:
Well that always the issue, reading between the lines, I would say "making a living" from your trading would be the economic substance.
Click to expand...

That is incorrect though.

"Making a living" is not the criteria for paying tax on an income. If you make more than £1000/year from a hobby you will pay income tax on profits over £1000 even though you aren't making a living from your craft.

Ecomomic substance means whether you are purely making money from placing bets OR whether you are making money from taking bets i.e. Making commission and profits from punters that lose.

It's plain and simple: Meaning of trade: exceptions and alternatives: betting and gambling - introduction

The basic position is that betting and gambling, as such, do not constitute trading. Rowlatt J said in Graham v Green [1925] 9TC309:

‘There has been no decision of a court in Australia nor, so far as I am aware, in the United Kingdom where it has been held that a mere punter was carrying on a business.’

However, an organised activity to make profits out of the gambling public will normally amount to trading

Meaning of trade: exceptions and alternatives: betting and gambling - the professional gambler

The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade.
 
I may have mentioned this before but talk to the hmrc......I have in the the past to ensure I dont ever get nasty shocks .....great stuff here but talk to the devil to,get clarity

N
 
Exactly SFXC, there is not much on the upside, but a huge problem on the downside of getting this wrong. Accountants all seem to have a different takes on it, but as your see it is firmly on HMRC's radar as the above is a test case. The old maxim that If it looks too good to be true it probably is applies. And as my MP stated, mentioned above in the thread, "Anyone who expects to earn a living in the UK and pay no tax is living with the faeries.
 
sorry to resurect an old thread.
but i have a question
according to https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim22016 where Hawkins J in Carlill v Carbolic Smoke Ball is pretty clear that even a cfd should be considered a wager and bet and be tax free. there is no difference if cmc markets calls it a £1 bet per point on the ftse or a 1 lot cfd. in either case both parties are potentially wagering an outcome to either profit or lose.
it is clear in the guidelines City Index Ltd v Leslie that a cfd would be for example the following
i. where a company places such a wager that it would be considered a cfd as companies are not supposed to gamble shareholders funds and only invest them and therefore would be a cfd https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm50380
ii. hmrc defines a cfd as "make a profit or avoid a loss" in other words there is another interest and reason for entering the cfd e.g. to avoid a loss which would be applicable when someone does a hedge https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm50380
iii. if someone places a cfd in order that if he makes a loss it will offset some of his other tax that would also come under the above ii whereby he had another interest.

BUT merely the fact that a broker will terms something "a spread bet" trade or term it a "cfd" trade would have no implication in the tax law according to my understanding.

Furthermore i have just seen a goverment paper from australia. https://www.ato.gov.au/law/view/pdf/pbr/tr2005-015.pdf in australia the view is much more simplistic in being a bet or gamble to be tax free has to be recreational like betting on horses or casinos where both parties know that they don't really have any reason or rhyme in getting the outcome correct. it is also made unfrequently. and accodingly it states that if a person would purchase a cfd from a broker as a one off without understanding the markets but just as a simple recreational wager it would be tax free see paragraph 42

alternatively in paragraph 46 it states that some juristrictions in australia disagree with the above and derive the law simply from the old fashioned Hawkins J in Carlill v Carbolic Smoke Ball which would mean that cfd's would be considered gambling besides for the previous senarious i went through in i,ii,iii

Please do correct me if you think i am wrong but not from pure feelings rather from factual evidence or from deducing official hmrc webpages or legislation

p.s. i have seen this which goes into similar points at length but i don't see any conculsions there
 
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The UK government position is ambivalent in that while it accepts spread-bets as being a type of CFD for financial sector regulatory purposes, it treats spread-bets and CFD's differently for tax purposes.

How long they will permit this situation to continue is a very valid question. But at this moment there is no question as to whether the two instruments are subject to CGT - CFD's are, spread-bets are not.
 
gi trader, I agree with you but...there were companies, I have no idea if they are still doing this as it was a while ago...who would allow traders to trade directly onto the Derivatives markets and then, post trade, convert this into a CFD or spread trade, for the sole purpose of tax avoidance. HMRC see this for what it is, a prettyobvious tax wrapper. Also the picture changes depending on if you are just punting trades for fun or if it is your main source of income. Once again, as Daimian Green MP stated clearly, "nobody in the UK can expect to earn a living and pay no tax".
 
@tomorton , thank you for replying. i understand that what you have written is the consensus of most of the brokers. but do you know where i can find this somewhere on a government portal, or from legislation, or from a previous court case. because if i go to court which i might end up happening to me and try to claim that my cfd trades are in fact wagers, i would present to the judge Hawkins J in Carlill v Carbolic Smoke Ball and i would present the paper from australia government which backs up my logic. the judge would look at the matter cleanly based on the above. so in order to know the arguments against me would you know anywhere that it states the position of our goverment. thank you
 
CFDs are subject to CGT
Spreadbets are not subject to income tax or CGT

This is the current position in the UK and has been for many years.
 
gi trader said:
@tomorton , thank you for replying. i understand that what you have written is the consensus of most of the brokers. but do you know where i can find this somewhere on a government portal, or from legislation, or from a previous court case. because if i go to court which i might end up happening to me and try to claim that my cfd trades are in fact wagers, i would present to the judge Hawkins J in Carlill v Carbolic Smoke Ball and i would present the paper from australia government which backs up my logic. the judge would look at the matter cleanly based on the above. so in order to know the arguments against me would you know anywhere that it states the position of our goverment. thank you
Click to expand...
Sorry to be pedantic but hopeful of being reassuring, but it's the consensus of all UK CFD and SB brokers , not most of the brokers.

The guidance that HMRC usually refer to is BIM22015 - Meaning of trade: exceptions and alternatives: betting and gambling - introduction.
Probably CG56105 - Futures: financial futures: financial spread betting from HMRC's Capital Gains Manual would also be relevant.
I can't claim to have obtained or read either.

But I can make a bold challenge that there isn't a single financial spreadbetter in the UK who has ever paid CGT on their profits.

Just a thought - surely if your broker thought one of their CFD clients should be exempted from CGT, they would be happy to support you in an argument with HMRC? After all, tax exemption is a considerable commercial advantage to them.
 
Yes you are correct that is the view of all brokers. whenever i have proded a broker like ig or cmc for proof they always tell me that i have to ask my own legal tax advice to an accountant and they do not guarantee in the small print their accuracy as they are not qualified tax specialists. i also understand that no spreadbetters have been charged tax besides for a theortical one which was City Index Ltd v Leslie where his "spreadbets" were considered contracts of difference. see above link. but he didn't pay tax because he made a loss but had it have been a profit i am sure he would have had to pay tax.

my friend has made 500k in profit in cfd's but according to my understanding of Hawkins J in Carlill v Carbolic Smoke Ball including that australian paper. If my friend would go to court he could argue it was a wager. the judge wouldn't be interested in all the conflicting opinions of hmrc (as in the manuals there are a lot of conflictions) but would rather be only interested in official legislation or what previous court cases has brought. i just wander if there is anyone who has tried this argument in court and lost? I mean most people lose on trading cfd's and the big boys would often trade on actual markets like futures rather than synthetic markets so it is not that common a scenario

perhaps people on the forum may know an accountant who is familiar with this type of question and has spent time looking into it

let me know your thoughts
 
@gi trader. I'm guessing I'm like you inasmuch as I'm keen to understand the intricacies of something before I get involved.

However on this issue I will try to put your mind at rest, based on my own experience;

I have been an active investor for 40+ years, have held a spreadbet and CFD account since 2003, and have been active each year using those instruments. During that time I have been employed, self employed, and had a period where investing / trading was my sole income.

I am in self assessment, and complete an annual tax return to HMRC. I can confirm that there is no requirement to record any spreadbetting gains or losses. Capital gains do have to be declared (ie including CFDs) but only if there is a chargeable gain (or in the event your profits are over a cerain level)
 
@Big deal. Thanks for your information. My question is mainly regarding my friend who has made 500k on synthetic cfd trading. so like trading ig's cfd on ftse 100 for example. based on my previous arguments put forth i think there is a strong case in court these should be tax free as wagers.
i am essentially looking for arguments against me but arguments from solid proofs e.g. a previous court case or some legislation or manual as opposed to arguments simply becuase this is what everyone's consensus is, or "because all forums and brokers say so"
 
OK understood. I think if someone's making that sort of money they should seek an accountant anyway; their fees will be a drop in the ocean for them.
 
gi trader said:
@Big deal. Thanks for your information. My question is mainly regarding my friend who has made 500k on synthetic cfd trading. so like trading ig's cfd on ftse 100 for example. based on my previous arguments put forth i think there is a strong case in court these should be tax free as wagers.
i am essentially looking for arguments against me but arguments from solid proofs e.g. a previous court case or some legislation or manual as opposed to arguments simply becuase this is what everyone's consensus is, or "because all forums and brokers say so"
Click to expand...
Just a few points @gi trader
In a court of appeal it has been decided already that A CFD is "not merely a wager"
But your argument is different. your argument to the court will be. But the CFD my mate used was merely a wager and should be tax free?
The last decision clearly wasn't good enough, no? You dont think that a court of appeal is enough to dissuade you from your deductions, your going to cite Australian tax law instead and see if that helps? I can imagine the judge will be very impressed
you also think that the judge, who doesn't set law by the way, merely is there to uphold the law, your judge is going to be extra lenient, he will just want to pontificate over HMRC's supposed "contradictions" by going over old case law again and again and come to the same conclusion that a CFD is not merely a wager.
you do realise who sets and governs UK tax law? That's who you want to speak to. Thats the solid proof you need who have already said very much the same thing that A CFD is not merely a wager
Its not us that needs to prove to you that your argument you have put forward has no merit, it seems to me you need to prove why your mate's CFD is so extra special that it warrants the rewrite of UK tax law

1705654445655.png

City Index vs Leslie went to a court, then a court of appeal and HMRC have tried to simply summarise to a layman in their manuals to the public.
In essence, a CFD is a contract whose value depends on something else but is not simply a wager
 
@1invest thank you for your reply.
please help me understand which hmrc manual you are quoting from. do you have a link?
from what i have understood you are quoting "City Index Ltd v Leslie".
In that case Mr leslie actually opened a "Spreadbet" account. and even so the judge considered his trades to be cfd's

Now if you are bringing me proof from Mr Leslie according to your logic all spreadbet trades would also be taxable and the consensus of all brokers and forums is that at least spreadbetting is tax free. Is that what you are purporting to say that all spreadbetting is taxable? that is why i am not understanding.

i have seen one place hmrc refers to leslie https://www.gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm50380
and differentiates between leslie and others with leslie being equivalent to a company trading. and companies are different because they wouldn't usually gamble on investors funds etc

1705660169590.png
 
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