Spread betting is the placing of a bet on some market on the direction in which the market will move, with the reward or loss proportional to the size of the movement. As such, it is possible to make money when a market is falling, but it is also possible to lose much more than was originally staked.
All that is required to undertake spread betting are a computer with access to the internet and some patience. It is possible to bet not only on financial markets, but also sport and politics and other less obvious markets. The largest ever gain was made in 1997, when one investor made £5 million from a very large trade on the exchange rate of sterling to the French franc.
Spread betting is one of the most accessible ways in which people outside the world of finance can get involved with financial markets, and contrasts sharply with the prior reputation of financial trading as a millionaire’s trifle. Experience can be gained with a demo account, and other spread betting offers are available.
Because it is considered to be a form of gambling, income from spread betting is generally free of Capital Gains Tax. If you support yourself financially from another source of income, all the profits from financial spread betting are exempt from income tax.
If there were any possibility that earnings from spread betting might be considered to be a person’s main income, it would cost hundreds of thousands of pounds to mount a defence, so it is best to err on the side of caution in this regard. The key question is whether spread betting meets the badges of trade, which would make it an adventure in trade. Badges of trade are easily googled upon, and include the number of transactions, the period between purchase and sale of an asset, and the manner in which a trade was carried out. In the latter case, earnings would be exempt if a sale were made to raise cash in an emergency.
If betting income were taxed, relief would have to be given for losses incurred by betting, and there are many more loser than winners in the game of spread betting. Some other European countries regard earnings from spread betting as taxable.
Tax is levied as a performance fee which is passed on to the betting client and is built into the price of a spread bet, so there are no free lunches in evidence. Peter Cruddas, the founder of CMC markets, said, “The taxman does very well out of UK spread betting, since he gets to take a clip of every trade.”