How spread betting may benefit UK investors facing a Capital Gains Tax (CGT) increase

Overview of the new Capital Gains Tax laws in the UK

The UK’s Autumn 2024 Budget saw Capital Gains Tax (CGT) rates increased, affecting individuals owning assets like stocks, properties (not primary residences), and other investments. The key changes include:

Higher CGT Rates: Capital gains are now taxed at higher rates, depending on the taxpayer’s income level:

- Basic-rate taxpayers - 18% from 10%.

- Higher-rate taxpayers - 24% from 20%.

Lower Exemptions: The annual CGT exemption has been reduced from £12,300 to £6,000 for the tax year 2023/24. This change means that individuals can now only make gains up to £6,000 tax-free* before CGT is applied to any excess. In the following tax year (2024/25), the exemption will further decrease to £3,000.

These adjustments highlight the need for alternative trading methods, such as spread betting, to help UK investors better manage their tax liabilities.

The tax benefits of spread betting

Unlike traditional investing, where gains above the allowance may be taxed^, spread betting enables traders to keep the full amount of any potential profit with tax benefits. This tax benefit is a key reason why many investors will find spread betting especially attractive following the CGT increase. Structurally, spread betting doesn’t involve ownership of underlying assets which contributes to its tax exemption status*.

Additionally, spread betting does not incur Stamp Duty*, which can be applied to the purchase of UK shares in traditional investing. Both of these exemptions are significant for those seeking a tax-efficient^^ trading approach.

^Note: Basic-rate taxpayers are charged 10% on realised profits, while higher-rate (and additional rate) taxpayers pay 20%. Losses on investments can be set against gains, but they must be reported to HMRC

^^It's important to note that individual circumstances vary, so traders and investors should seek personalised advice from a tax advisor.

*Disclaimer: The term “tax-exempt” is based on current UK tax law, which may be subject to change. Eligibility for tax exemption varies according to individual circumstances. It is recommended that individuals consult a tax professional to understand how these rules may apply.*

Key Advantages of spread betting beyond tax benefits

Aside from its obvious tax benefits, spread betting can offer several other appealing features for both investors and traders:

Leverage: Spread betting allows traders to use leverage, enabling positions to be opened with a fraction of the actual asset’s cost. For example, 10:1 leverage on a £100 position offers exposure to £1,000 of the underlying asset. While leverage can significantly enhance profits, it also heightens risk, making risk management a vital aspect of spread betting.

Market Access: Spread betting platforms offer access to foreign exchange, commodities, indices, and stocks, allowing for diverse market exposure without actually owning the underlying assets.

Earnings Potential in Rising and Falling Markets: Unlike traditional investing, spread betting allows traders to take “short” positions, which can benefit from price declines.

24/7 Markets: Many platforms, such as Pepperstone, offer around-the-clock trading for major markets, allowing traders to react in real-time to global economic and geopolitical events.

Spread betting vs. traditional investing

Spread betting differs from traditional investing in a number of key ways:

Asset Ownership: Traditional investors own the assets - stocks, bonds, or property - and may benefit from dividends and asset appreciation. In spread betting, traders speculate on price movements without ever owning the underlying asset.

Long-Term Growth and Dividends: Traditional investing is more suited to those seeking long-term capital appreciation and dividends, while spread betting typically appeals to short- or medium-term traders focused on trends.

Taxation: Spread betting is tax-free*, while traditional investments may incur CGT. However, traditional investments held in ISAs (Individual Savings Accounts) can also provide tax-free* benefits. The ISA allowance for 2024/25 is set at £20,000.

Risk Profile: Traditional investments generally have lower risk, particularly if well diversified and held long-term. Spread betting involves higher risk, especially with leverage, and is often utilised by more frequent traders.

Combining spread betting and traditional investing

Integrating spread betting with traditional investing can create a more balanced and strategic approach to managing an investment portfolio. Traders and investors can effectively combine both methods to enhance returns, manage risk, and capitalise on various market conditions by considering the following factors:

Diversification of Strategies

Combining spread betting with traditional investing allows for diversification of strategies. While traditional investing typically involves long-term holdings in stocks or bonds, spread betting enables traders to take advantage of short-term price fluctuations in different assets, including forex, commodities, and indices. This diversification can help:

- Balance Risk: Traditional investments tend to be less volatile and can provide stable returns over time, while spread betting allows for quick opportunities on market fluctuations. Market, leverage, liquidity, regulatory, psychological, and counterparty risks impact both traditional investments and spread betting, while fees and information accuracy can further complicate overall risk exposure.

- Enhance Returns: By leveraging short-term trading opportunities through spread betting, investors have the opportunity to enhance overall returns without completely dedicating capital to long-term investments.

Hedging Against Market Volatility

Spread betting can be an effective hedging tool for traditional investments. If an investor anticipates a downturn in the market or in a specific sector, they can use spread betting to:

- Short-Sell Indices or Individual Stocks: This allows investors to profit from falling prices, offsetting losses in traditional long-only investments.

- Limit Downside Risk: By strategically placing spread bets in the opposite direction of their traditional holdings, investors can reduce overall portfolio risk during volatile market conditions.

Active Trading vs. Long-Term Investing

Combining both methods caters to different trading styles:

- Active Traders: Those who prefer to take advantage of short-term price movements can engage in spread betting while maintaining a core portfolio of traditional investments for stability.

- Long-Term Investors: Investors focused on long-term growth can use spread betting for additional income and to capitalise on temporary market inefficiencies without altering long-term strategy.

Risk management and additional key considerations

Effective risk management is essential when trading with leverage. Key practices include:

Set Stop-Loss Orders: Stop-loss orders are intended to minimise potential losses by automatically closing a position at a specified price. However, they do not guarantee the exact closing price, as slippage can occur, particularly in volatile market conditions.

Manage Position Sizes: Allocating a small percentage of trading capital (typically 1-2%) per position can limit exposure and protect against significant losses.

Use Leverage Carefully: Leverage magnifies both gains and losses. Beginners may benefit from using lower leverage (e.g. 5:1) until markets are better understood.

Stay Updated on Market News: Economic reports, central bank decisions, and geopolitical events can heavily impact markets. Many platforms, including Pepperstone, offer regular updates and economic calendars to keep traders informed.

Set Realistic Profit Targets: Defining profit goals and taking profits at predetermined levels can help secure gains.

Getting Started in Spread Betting with Pepperstone

Pepperstone is a popular choice for spread betting due to its competitive spreads, wide range of markets, and risk management tools. Here’s how to get started:

1. Open a Spread Betting Account: Sign up on Pepperstone’s website, selecting a spread betting account. Personal identification and financial information will be required to ensure compliance with UK trading regulations.

2. Choose a Market: Pepperstone offers trading across forex, indices, commodities, and shares, allowing traders to select markets aligned with their strategies.

3. Utilise Pepperstone’s Tools: Pepperstone provides charting tools, market analysis, and educational content, alongside risk management tools like guaranteed stop-loss orders, which ensure trades close at specified levels, even in volatile markets.