Spread betting is a popular form of derivatives trading in the UK that allows traders to speculate on the price movements of an underlying asset without owning it. Spread bet providers offer 'spreads' on a variety of financial markets, including shares, indices, currencies, treasuries and commodities.

Traders then place bets on whether the price will rise (going long) or fall (going short) within a certain timeframe. The amount that is won or lost depends on the accuracy and size of their bet.

Spread betting profits are not taxed in the UK through income tax, capital gains tax, or stamp duty due to how they are regulated under the Financial Services Authority. This tax-free status makes spread betting attractive for traders seeking to maximise returns. However, there are some exceptions in which HMRC taxes spread betting profits.

When profits from spread betting are taxed

While profits made from most mainstream spread betting activities are not taxed, there are some situations where HMRC can tax profits:

Spread Betting as a Main Source of Income: If an individual relies on spread betting profits as their main source of income, this activity is considered a financial trade. As such, any profits above the annual Capital Gains Tax allowance would be subject to income tax rates up to 45%.

To be defined as a financial trade, HMRC looks at factors such as the frequency of betting, the sophistication of strategies and systems being used, the level of skill and judgement applied, and the scale of activity in terms of stakes and turnover.

Profits from Financial Spread Betting Firms: While individuals' spread betting profits are generally tax-free, the companies providing the spread betting platforms and services are still subject to taxes like any other UK company. These financial spread betting firms pay corporation tax on company profits.

Spread Betting Professionals and Full-Time Traders: Spread betting can still be classified as gambling without being subject to income tax if it does not meet the threshold of being an individual's main source of income. However, since April 2017, professional gamblers, including professional spread betting traders, must pay tax on their profits. HMRC now defines a professional or full-time trader as someone who bets for a living systematically rather than occasionally, and profits are subject to income tax rather than capital gains.

Spread Betting as Part of an Owner-Managed Business: If spread betting activities form part of the trading activities of an owner-managed business, any profits may be subject to income tax and National Insurance, depending on individual circumstances.

Limited company owners who engage in spread betting alongside their regular company business need to carefully determine whether the spread betting should be treated as a hobby or part of the taxable trading business activity. Seeking tax advice is highly recommended in such instances.

Spread betting losses for tax purposes

In many jurisdictions, including the UK, spread betting is considered a form of gambling rather than investing. As such, any profits from spread betting are typically exempt from capital gains and income tax. However, the treatment of spread betting losses differs from profits. Losses incurred from spread betting are not tax-deductible against other forms of income, such as salary or rental income.

Spread bettors must keep detailed records of their trading activities, including profits and losses, to accurately report their financial transactions to the tax authorities. Failure to do so can result in penalties and legal consequences.

Due to how the Financial Conduct Authority regulates the industry, the UK's most mainstream spread betting activities generate tax-free profits. This retains an advantage over CFD trading, which is liable to capital gains tax.

However, scenarios exist where HMRC seeks to tax spread betting profits, mainly if they constitute an individual's main source of income or for full-time professional traders. While tax efficient, traders still need to know the risks spread betting holds.