Spread betting vs CFDs

Published on: 29/10/2021 | Modified on: 31/01/2023

Spread bets and contracts for difference (CFDs) are margined products that can provide similar economic benefits to investments in shares, ETFs, commodities and currencies. Both forms of financial derivative trading, spread betting tax is treated differently to CFDs in the UK and Ireland, which is the key distinction between the two products.

Continue reading to discover more about tax, accessibility and other issues that you’ll be required to address when placing speculative trades with us.

KEY POINTS

Both products are an alternative to direct investment
Trade on both sides of the market by taking a “buy” position if you think the asset will rise in value or a “sell” position if you think the asset will fall
Spread bets are available in the UK and Ireland*, whereas CFDs are available in many more countries worldwide
Both come with varying charges such as commission fees, additional spreads and overnight costs
The use of leverage is required when trading either product, which gives you greater exposure to the financial markets

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Content Links

What are the differences between spread betting and CFD trading?
Spread betting tax in the UK explained
What is capital gains tax?
Example of a trade using both products
Why is spread betting tax-free?

What are the differences between spread betting and CFD trading?

There are a number of factors that may lead a trader to prefer one over the other, which we explain in further detail below. So, what will it be for you, CFDs or spread bets?

Feature	Spread betting	CFD trading
Tax treatment	Profits made are exempt from stamp duty and capital gains tax in the UK and Ireland*.	Since you don't own the underlying asset when trading CFDs, there is no stamp duty to pay. However, you will be subject to CGT.
Who can spread bet and trade CFDs?	Only available to customers who reside in the UK or Ireland.	Available to customers globally.
Short selling	You can go long as well as short so you can take a long position when market prices are rising or open a short position when prices are falling.	Ability to go long as well as short so you can take a long position when market prices are rising or open a short position when prices are falling.
Commission charge	When spread betting shares on our platform, no additional commission will be charged to your account (other fees and charges apply).	When trading shares on our platform, a CFD commission will be charged to your account upon execution of any order. This is in addition to the spread.
Spreads and holding costs	An additional spread is built into the prices displayed on our platform, which is applicable upon execution of any order. Holding costs may apply to spread bets.	With CFDs, holding costs may apply.
Calculating profit and loss	To calculate your profit or loss, find the difference between the price at which you enter and the price at which you exit, then multiply this difference by your stake.	With CFDs, your profit or loss is determined by the difference between the price at which you enter and the price at which you exit, multiplied by the number of CFD units.
Margined trading**	Spread betting is a financial leveraged product, which means you only need to deposit a small percentage of the full value of the spread bet in order to open a position.	CFDs are a leveraged product, which means that you only need to deposit a small percentage of the full value of the trade in order to open a position.
Timeframe	Short-term: daily, weekly, and monthly trades.	Short-term: daily, weekly, and monthly trades.
Forward contracts	Yes	Yes
Range of markets	More than 12,000 instruments, including forex, stock indices, shares, ETFs, commodities, bonds, and share baskets.	More than 12,000 instruments, including forex, stock indices, shares, ETFs, commodities, bonds, and share baskets.
Dividends	We make dividend adjustments on stocks and indices positions.	We make dividend adjustments on stocks and indices positions.
Available for hedging	Yes	Yes
Trading hours	Trade out of hours on forex and major stock indices with 24/5 access.	Trade out of hours on forex and major stock indices with 24/5 access.
Corporate account	No	Yes
Mobile trading	Yes – iPhone, iPad, Android.	Yes – iPhone, iPad, Android.
Available on MT4	No	Yes – forex, index and commodity CFDs.

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Spread betting tax in the UK explained

When compared to conventional share trading and CFD trading, spread betting is unique in that it’s the only product to offer tax-free trading in the UK and Ireland.

No stamp duty. Unlike traditional share trading, you don't have to pay stamp duty when you spread bet because you are not buying the underlying product. Instead, you take a position based on whether you expect the price of that product to rise or fall.
Profits are exempt from CGT.
Commission-free trading. This method is exempt from many of the costs that you face when you trade shares with a stockbroker, such as commission fees on profits, which you also have to pay when trading CFDs.

What is capital gains tax?

CGT is a type of tax that CFD traders are required to pay if selling or exchanging an asset that has increased in value, leading them to make a profit. The gain you make is the amount you must pay in CGT, rather than the amount of capital you receive. For example, if you open a long position on an asset, buying at £1,000 and selling at £1,350, the £350 profit you’ve made will be subject to CGT.

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Example of a trade using both products

Trading on the UK 100

Here’s an example of how to trade on our UK 100 – Cash instrument, which is based on the UK’s benchmark stock index measuring the performance of 100 companies. The following information is the same for both spread bet and CFD products:

Sell price = 7277
Buy price = 7278
Spread = 1
Margin rate = 5%

Let’s assume that you think the price of the UK 100 will rise, so you open a buy (long) position with the hope to profit from its new value.

Spread betting	CFD trading
You open a stake size of £10 per point. For every point that the instrument moves up or down, your profit or loss will be multiplied by your stake amount	You buy 10 CFDs or ‘units’ at the buy price. At the end of the contract, the difference between the opening and closing prices will be exchanged

The UK 100 has a margin rate of 5%, which means you only have to deposit 5% of the total value of the trade as your position margin.

Spread betting	CFD trading
Position margin: (5% x (£10 x 7278)) = £3,639	Position margin: (5% x (10 x 7278)) = £3,639

The UK 100 then moves to a new sell price of 7302 and buy price of 7303. This means your prediction is correct and the instrument rose in value. You decide to close your bet by selling at the new sell price of 7302.

Spread betting	CFD trading
As the UK 100 has moved 25 points in your favour, multiply this by your stake size to calculate your profit (25 x £10 = £250)	As the UK 100 has moved 25 points in your favour, multiply this by the size of your position to calculate your profit (25 x 10 units = £250)

What about any extra charges?

Spread betting	CFD trading
No commission charges Holding costs will apply if carrying positions overnight	CFDs are subject to CGT* There is a commission charge on share CFDs Holding costs will apply if carrying positions overnight

Read more about trading costs that may apply to your spread bet and CFD positions.

Questions?

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Why is spread betting tax-free?

This is because it’s a speculative method of trading, rather than a direct investment. When you spread bet, you don’t take ownership of the share, index or commodity; instead, you’re predicting whether the market price will go up or down.

However, please note that the product is only tax-free if it’s not your primary source of income. If you earn a sufficient amount of money from another source, such as a full-time job unrelated to trading, then you won’t be taxed for your spread betting hobby, as you’ll already be paying to HMRC.

While you’re able to keep all of your spread bet profits, you won’t be able to offset those losses against CGT. On the other hand, while you pay CGT on CFD profits, you can use it to offset losses.

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FAQs

Does leverage work the same for spread bets and CFDs?

Trading with leverage works in the same way for spread bets and CFDs. A trader is only required to deposit a fraction of the full value trade in order to gain exposure to the markets. Remember that profits and losses are magnified equally and reflect the full value of the trade.

What is the spread in a CFD?

In CFD trading, the spread is the difference between the buy (bid) and sell (ask) price that is quoted for a financial instrument. The buy price is higher than the sell price, and the spread will fluctuate depending on market conditions. Read more about calculating the bid-ask spread.

Can you spread bet internationally?

Spread betting is only available for customers in the UK and Ireland. However, contracts for difference (CFDs) are available to trade internationally, where you will have the same exposure to the markets through the use of leverage. Read about the risks of CFDs.

Can you trade spread bets or CFDs without leverage?

Our platform requires clients to trade with leverage. However, the minimum margin rate is different for each individual instrument, so please check our markets page for more information. If you’re worried about the risks of leverage, we recommend that you use our risk management and execution tools when opening a position. Read about our spread betting demo account to practise trading on margin.

Are spread betting and CFD trading tax-free?

Both spread betting and trading contracts for difference (CFDs) are exempt from stamp duty, as you do not own the underlying asset. However, you must pay CGT on your profits when trading CFDs. Read more about our CFD costs.

*Tax treatment depends on your individual circumstances. Tax law can change or may differ in a jurisdiction other than the UK.

**Remember: when trading on margin, the amount you will be required to deposit reflects a percentage of the full value of the position. This means that your losses will be amplified and you could lose all of your capital. Trading using margin is not necessarily for everyone and you should ensure you understand the risks of spread betting and CFDs. If necessary, seek independent professional advice before placing any trades.

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