Why spread bets are a tax winner

Investors normally have to worry about three taxes on their transactions.

First off there’s income tax on dividends, bond coupons and interest. This is levied at rates up to 50% from this April for high earners.

Next there’s the tax on any trading profits, called capital gains tax. This is now charged at a flat rate of 18% of any gain (the difference between what you pay for an investment and what you eventually sell it for). However you do get the first £10,100 tax free as an annual allowance from HMRC.

Finally there’s the registration tax, stamp duty, levied at 0.5% on the buyer of shares.

The great news about spread bets is they are income and capital gains tax-free for investors (although watch out if you start doing it for a living as at that point you may be taxed on profits from your trading activities) plus they are exempted from stamp duty. All you have to worry about in cost terms is the commission you pay to your broker – i.e. the size of the bid to offer spread.

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There is one drawback to spread bets being CGT free however. That is you can’t claim any relief for losses, as you would be able to if you sold say shares at a loss. That’s one reason some investors prefer contracts for difference (CFDs). These are similar to spread bets in many respects but are subject to capital gains tax and also attract loss relief when trades backfire.