Tax free investing via DMA spread betting?

twinbee

Spread betting is usually for short term investments, but I was considering using it for very long term (>10 years) and with amounts in the five-figure range. In particular DMA spread betting apparently uses the market behind the scenes, but has the advantage it's tax free.

I like the idea of spread betting not just to save money, but to save time, as no tax means little or no paperwork.

Has anyone here done this? How does it compare to traditional investing? Doesn't spread betting like this mean you lose out on dividends or other perks of owning a stock directly?

jimjames

An ISA is tax free for 5 figure sums per year and a lot less risk.

twinbee

Only up to 15k with NISA I think?

When you say a lot less risk, do you mean that I might gamble it away? Because I'd only put the equivalent on what I'd use with traditional stocks (so if the company went to zero, I'd lose the exact same amount that I would with traditional stock investment as with spread betting).

bowlhead99

With spread betting you can't place a bet ten years out. Maybe just a couple of quarters at a time. So, as your bet expires you need to roll it over and that has a cost. And you are not betting the price will rise from today's price, you are betting that the actual price in September will be higher than people currently think the price will be in September. And beat the spread. Which has a cost. Would you use leverage? That has a cost.

It is tax efficient, yes. But keeping paperwork is not actually that hard if you are buy and holding for a decade. If you were not high rate tax then divs from real shares are tax free and CGT allowances can be managed with timing. And ISA allowances are very useful as when you are in retirement and no longer interested in betting on shares and indexes, you would be glad of a huge ISA wrapper which you would have never built up if using spreadbets.

You don't miss out on divs with spreadbets .If you bet the price would be 200p and then they go ex div for a 5p divi, they adjust the bet down to 195p. So if the price is still 200p after paying out the divi, you will make an extra 5p "win".

You do miss out on shareholder perks though. I've scaled back my Mitchell's and Butler's holding to just a few hundred quid, but I can still ask for an annual shareholder voucher book to get a load of vouchers giving 20% off the entire food and drink bill in any of their restaurants and gastropubs for 10 people at a time, which can be worth several hundred quid a year. Bad example because as it happens with MAB, you could just own 5 shares and spreadbet a £10k virtual holding. But many shareholder perks require a minimum holding of real shares.

Plus you don't get to vote or attend meetings if you don't have any real shares, may not bother you of course.

tg99

I do use spread betting for some longer-term holdings outside of my tax free vehicles as I have found the rollover costs and implicit funding costs can be offset by the tax saving on the dividend and the ability to only need to put down 5-10% margin so can then hold the rest that would have been invested in physical shares as cash in a savings account so maybe earning about 0.7%ish net if a higher rate taxpayer. Obviously this is more for shares/indices that pay a decent level of dividend given this is where a major part of the cost saving comes from. And add to this that gains are free of CGT so been a good strategy to use over recent years but on the flipside if you expect markets to fall over the long-term then you'd potentially be better off holding these positions as physical shares/funds so that any losses can be used to reduce CGT.

There is also a bit of an FX saving compared to buying physical shares through a broker as they often charge something like 1-1.5% at each end when buying non-£ denominated shares. (Though IG Index have launched a stockbroking service which has much lower FX charges than others I've seen, something like 0.3% if my memory serves me correctly.)

Spread betting can also be useful for short-term hedging, e.g. if you hold shares that have had a big gain by January and you want to lock in the price at that point but selling them will push you over your CGT allowance then you could take out a corresponding short-position through a spread bet until you get to the new tax year. Also if you want to avoid being out of the market for 30 days if selling and rebuying the same asset then you could use a spread bet to retain exposure during this period.

Also tend to use sometimes for hedging purposes, e.g. short positions to offset some of my long equity risk, hedging currency risk (e.g. I've not wanted any Euro or Yen exposure so for example where I have a fund holding that does not have a currency-hedged share class then I take out an FX position via a spread bet to effectively convert my exposure back to £ or to the $).

Also worth noting if you have already used up your CGT allowance and you are wanting to hedge any gains above this then the hedge size should be adjusted down to 0.72 of the physical position if you are a 28% CGT payer given that the gains or losses from the hedge are tax free.

TakeCareOfThePennies_2

twinbee wrote: »

How does it compare to traditional investing?

Its no different to traditional investing as long as you keep the same decision making process.

The problem most people have is they get tempted by the possibilities of short-term bets .... and that's where things go wrong. Anything from a month upwards and and spreadbets are perfectly fine, weeks days, hours, minutes and seconds are where you'll find the dead bodies and horror stories.