UK tax on futures trading?


Here is my understanding of UK taxation of futures trading. Please correct me if I am wrong:

If a person does not do any of the trading themselves and does not rely on it for income i.e. they have some other job, and they grant 'power of attorney' to someone else to trade their account on their behalf, then there is no way that the profits generated in their trading account could be subject to UK income tax. It would have to be capital gains tax, right?

So that means that the first 8,500 quid profit generated in that trading account would be tax-free, right? (capital gains tax-free allowance for 2005/2006).

Suppose 10 Brits all had futures trading accounts that were managed by a third party and all 10 Brits never did any of the trading and did not withdraw money to live on. They all had normal jobs producing income from other sources. The money manager would be able to trade all 10 accounts simultaneously and generate 8,500 tax-free profits per account holder, right?

Is there anything inaccurate with the above observations?

If an individual account holder per the above does make <8,500 quid in their futures account, is that individual required to disclose this activity on a self-assessment tax return, or is disclosing futures trading profit only required when it would be >8,500 quid i.e. when tax would be due?

you can actually make an argument either way!
stockjobbers used to pay income tax on their salaries and cgt on their jobbing.
however if you "trade" lots the revenue may wish to declare your income as trading (hence no capital gain and profits will be treated as income)
What people never understand is that there is scope with the inland revenue to make a case for what you believe is most representative - anyway as you are in America you clearly have your own circumstances dont you?
The body carrying out the trades would have to be FSA regulated to carry out this function, highly costly and a buracratic nightmare.

However your base assumption may be incorrect.

I have it in writing from the HMRC that someone trading futures for a living would likely not be carrying out a 'trade'. In this circumstance only CGT applies. They quoted several items of case law.

I have it in writing from the tax man that I am carrying out a trade and thus liable to income tax. I filed my first self-assessment return last April and they were happy with it.
I trade index futures full time as a self-employed individual and have a small amount of other income from freelance editing.

I would be willing to bet that another tax office would have made a different decision. Funny old Hector. :)
The general rule is that transactions by individuals in shares are not generally trading transactions. As such they would usually fall within the charge to Capital Gains Tax.

Even holding shares for a very short terms and buying and selling frequently would not necessarily be classed as a trade. This is effectively a form of speculation and will usually fall short of trading.

In order for there to be a trade you would need to have an organised activity that was carried out to generate a profit. This would involve much more than just buying and selling frequently. Looking in the Revenue's internal manuals they specify this as follows:

'…To determine if a speculative activity is trading (or an adventure in the nature of trade), it is important to consider whether the operations are carried out in the same way as any ordinary trader in those assets operates. Established traders in shares operate to minimise, or limit, the exposure to chance. They do this in a variety of ways.

They have customers who sell to them and buy from them regularly, to whom they market their services, and will quote prices for buying and selling. The prices quoted will be spread, so they can achieve profits. They make profits from moving huge volumes of shares very quickly.
They hedge large holdings of a security with derivative instruments to ensure that if they hold on to positions for any length of time, they have only a limited exposure to general market movements.
They have very strict rules about the degree of risk to which any trader is allowed to expose the firm.
So, while share traders do buy and sell shares to profit from anticipated market movements it is not the sole way in which they make a profit.

Speculation is only part, and a strictly controlled part, of a more complex trading operation. Their operations are designed to make profits whichever way market prices move, by turning over stock as a wholesaler or as a retailer.

Whether an individual operates in the same way as a share trader is a question of fact. So, it is necessary first of all to establish how the individual operates and what action he or she takes to minimise risk and secure profits…'

You would need to apply these rules to your specific circumstances. Certainly arguing that your activities were investments (or more accurately not trading activities) would usually be preferred given the significantly lower rate of tax on any gains.

For most share or financial speculators it is hard to view this as a trading activity. It looks more like speculation.

What about hedging?

Many people hedge their investment position which is one of the indicators of trading however whether this was part of a sophisticated risk reduction strategy to limit risk and maximise profits whichever way the market turned is questionable.

In many cases profits essentially arose from luck with the market reversing and ensuring your overall position was profitable.

In this case this would look to be speculation, and is analogous to gambling. You would therefore have a good argument for CGT treatment.

Note that as always it depends on the facts. If this high volume, frequent trading and hedging activity carried on a for a fixed period prior to a total withdrawal (or least a period when shares were held more long term) this would support any argument that your activities were simply a one-off period of speculation with the profits arising from good luck.

If it was a more long term, sophisticated operation with numerous hedging positions and profits made year in - year out it would be more difficult to escape a trading argument.
I find this thread very interesting

I am from the UK, what if I set up a US bank account. Traded futures through a US broker and then once a week withdraw funds to the US bank account. Would I be charged tax before it left the US brokerage to go into the US bank account?

Then I imagine I could take it from the US bank account and transfer it to an off shore account, that's only if suddenly the dollar wasn't so strong anymore. Otherwise I would just keep it in the US bank account.

Can this be done?
If a person does not do any of the trading themselves and does not rely on it for income i.e. they have some other job, and they grant 'power of attorney' to someone else to trade their account on their behalf, then there is no way that the profits generated in their trading account could be subject to UK income tax.

You are the rightful owner of the account, you have to pay taxes on the increase of the
value of the account. You grant the power of attorney is almost the same that you let the
(mutual) fund manager manages your account. You have the right to deduct the tax loss on your mutual shares, and you have to pay taxes on the earnings.