Contracts for Difference Tax Implications


Remember, son, these are your tax-free years. Make the most of them. - CFDs

The IR will always take the view that if ALL your income is from trading or at least a very, very high percentage of it is, then that is the source of your 'income' and as such it should be taxed as 'income' rather than as 'capital gains'.

Now it does take some time for them to get to this point if it is actually relevant to you - if they ever do. Perhaps it might depend on how you or your agent present your affairs and even the presentation of your own tax return supporting schedules.

Mostly I would think, we all have "other income" and so if this IS the case, our spreadbetting is 'betting' and thus tax free. Our CFD trading is taxed as 'capital gains' (if there are any gains) and all the CFD trades are taxed using the 30 day rule, because they are ordinarily liable to capital gains tax.

This 30 day rule does get to be extremely complicated and this is where it might be best to use an agent (accountant) for your tax return.

There are some apparently great, albeit complicated ways to avoid tax. Some carry higher risks than others and some are more complicated than others. They can involve "offshore schemes" with or without residential status, offshore registered companies that submit returns to other countries with more advantageous tax regimes, living on an 'always at sea boat' and lots more.

You'll find in life that just like with garage mechanics, there are good agents and bad agents. They are 'professionals' and charge by the hour. Perhaps they have a vested interest in being specialists in an area of work for you, which they have suggested to you, and can maintain and sustain for you. Do try to make sure they are actually acting for you and not for themselves.

Some of the tax avoidance schemes provided for clients work under the umbrella of trying to persuade the client that, just "Because it has been set up like that, well, that's why you don't have to tell the tax man about it." Of course this sort of scheme might as well not exist if it is taking you into the realms of mere tax evasion with the use of such a 'daft false cause' rule. This kind of stuff is for fools and is just plain ridiculous!

Throughout life, I've found it best never to let the tax dog wag your tail. If you can just about get it rationalised, and it really isn't too difficult, it is an absolutely fabulous thing to have a £4m tax bill every year. This would mean that you get to keep the other £6m. Things could have been worse and once upon a time in the UK it really was. Income Tax was 83% and Unearned Income Surcharge, for any annual capital gains on top of it, was a further 15% - making an annual taxation total of 98%.

Best advice I can give you is to employ an accountant to do your accounts, and provide advice and assistance - but forget the audit - (Many accountants consider a full audit a waste of time! I use Trio accountants myself. Their site is http://www.trioacc.co.uk. They are based in Cheltenham and will do a short report on each persons' circumstances for a fee of £195 plus vat from memory.

Save TAX on CFDs

The first point to note is that as CFDs are chargeable to CGT, any losses would also be allowable. Therefore losses incurred on CFD investments would be available for offset against other gains in the tax year - eg gains on share disposals. Just work out your profit/loss for the year and deduct your annual exempt amount. If you have any excess losses for the year you can carry this forward to deduct against any future chargeable gains.

Mimicking Bed and Breakfasting and CFDs

There are a number of uses for CFDs although the tax implications are closely linked to your particular trading strategies. One use is to sidestep the provisions that prevent Bed & Breakfasting of shares. This is where shares are sold one day and bought back the next in order to create a loss or to utilize the annual exemption.

The IR prevented this by stating that any repurchase of the shares in the next 30 days following the disposal would be matched with the disposal, effectively meaning that the shares were deemed not to be sold at all. However, many investors use CFDs to circumvent this.

By repurchasing shares in the form of a CFD, it would allow you still have a position in the shares during the 30 day period, and you could then repurchase without having lost out on any growth in value of the shares and without the bed & breakfast anti avoidance rules applying.


Example

You own shares that are standing at a small gain e.g. £5,000 or even at a loss. Prior to the end of the tax year you could dispose of the shares and crystallize the -:
  • loss
  • or gain. If a gain you may have the annual exemption to offset to eliminate the gain. If you could repurchase the shares you would have secured a CGT free uplift in value

You then purchase a CFD for the same number of shares. After 31 days you then sell the CFD position and repurchase the regular shares. By using CFDs you've always held position in the shares so it doesn't matter what the share price does. If it rockets then profits will be built up on the CFD trade to offset re-buying the shares at a high price. But if the shares slump then the loss on the CFD trade is offset by the cheaper price of the shares when they're bought through the stockbroker.

You would however, have crystallized the loss or enabled the offset of the annual exemption to reduce your overall tax charges.

You could also use CFDs to hedge against price falls and this short selling is a useful method for managing your liability for CGT liability.

In particular you can sell CFDs against an existing holding allowing you to control the time at which you crystallize capital gains or losses. This can also be useful for ensuring correct offset of losses and utilization of the annual exemption.

As an example, if you owned shares with a substantial gain but which are expected to fall short term. Rather than disposing now & missing out on future gains and the benefits of CGT taper relief, you could sell a CFD and then close your position in a few weeks. Assuming the shares fell in the period, the gain on the CFD would be offset by the loss on the shares. In addition if this was around the year end the closing of the CFD position could be arranged to be in the next tax year.