Investors can use a CFD to hedge against price falls and this short selling is a useful way managing your liability for capital gains tax.
In particular you can sell CFDs against an existing holding allowing you to control the time at which you crystallize capital gains or losses.
Deferring your Capital Gains
Deferring a share investment gain to a subsequent tax year can be very advantageous in terms of:
- Delaying the CGT payment date
- Utilising next years annual CGT exemption
- Utilising any capital losses that may be incurred next year (particularly beneficial as capital losses can’t usually be carried back).
Example
10,000 shares in ABC plc were originally purchased at 100p, and on 1 January 2009 stand at 200p. The investor wishes to lock in the gain, while deferring the capital gain until after 5 April 2009. The investor takes a short position via contract for differences over 10,000 shares at 200p.
On 6 April 2009 (assuming the tax year ends on 5 April), the share price is 250p. The investor sells the 10,000 shares, and closes the short position on his contract for differences over 10,000 shares. Ignoring brokerage charges and financing credits on the CFD short position, his gains for the tax year 2009/2010 are -:
Gain on shares 15,000
Loss on CFD (5,000)
Net capital gain 10,000
The £10,000 net capital gain is the same as if he had sold the shares in January 2009, except that it has now been realized in the 2009/10 tax year.
In reality the brokerage charges would increase the loss and the financing credit would reduce the capital loss, but the net effect would be more or less the same (ie the loss on the CFD would cover the position).
