Spread betting to avoid CGT

Jeremy535897

DoctorStrange said:

Jeremy535897 said:

DoctorStrange said:

I do agree that's how they're mostly used and if all things were equal I'd ignore the spread betting. But as capital gains and dividends are taxed differently, things are not equal.

Owning shares is still a gamble on the share price, and the economic risks between "betting" or "investing" are identical.

So it seems to me the only difference is the tax situation?

But then I'm no expert either,  hence looking to see what it is I'm missing! 😀

I suggest you look into the realities of spread betting further. The reason you don't pay capital gains tax on spread betting profits is because you don't actually own anything other than the right to receive a monetary sum if the share price moves in the way you bet.

I don't see much risk here provided you use an established broker like IG Index. 

What does "owning" a share actually give you other than a P&L on the share price alongside a dividend?

The tax benefits outweigh voting rights etc in my opinion.

It is your choice. I am a traditionalist, and would rather have the shares. I can understand that. The financial crisis was exacerbated by people who did not actually understand what it was that they were creating, never mind those who invested in those creations.

DoctorStrange

I do see where you're coming from and for the most part I agree with you.  If I could wrap everything in my ISA I would much prefer that, but I can't...

So,  if we leave that part aside for now,  are there any other pros/cons I'm missing? You say people didn't understand things before and that's what I'm trying to avoid. 

I'm only considering spread betting as it seems to me that all else is equal

If that's not the case, I'd like to understand the differences in order to make the correct choice. 

Jeremy535897

I would be the first to admit I don't understand how these things work, so I will pick on one thing you said, namely that "you seem to receive dividends" with spread betting. You also mentioned IG, so here is what IG say about spread betting when a dividend is paid:

"How do dividend payments affect my spread betting or CFD position?

With CFDs and spread bets, we make an adjustment on equity and stock index positions if a dividend is paid.
If you buy a stock with our share dealing service, then you will receive dividends if the company pays them."

From https://www.ig.com/uk/help-and-support/spread-betting-and-cfds/market-details/how-do-dividend-payments-affect-my-spread-betting-or-cfd-positio#

Now what this says to me is that if I bet on a share movement, that can be affected by a price being quoted !!!!!!-div, then ex-div after the next dividend is paid by the company to its shareholders. I think what IG are saying is that the drop in price from !!!!!!-div to ex-div will be excluded from the calculation of your ultimate profit or loss. It does not mean you receive a dividend. Indeed, IG say that you get dividends if you buy a stock, not when you spread bet. How could you receive a dividend on a share you never own?

If I buy a bundle of FTSE 100 company shares for £10,000, I might hope they rise by say 3% a year, or £300. I might hope they will do no worse than lose 3%, so I assume I am risking about £300. If I just buy one company's share, I might hope they may rise 10%, or £1,000, and possibly lose 10%. But if I bet £10,000 that the company's shares rise by 10%, and they don't, presumably I lose the whole £10,000? You might care to have a look at:

https://community.ig.com/forums/topic/6082-is-spread-betting-for-fools/

DoctorStrange

Thanks, I'll check that thread out and this is the biggest part I'd like to explore as I'm not 100% on it. 

Example A - Buy Shares

Today's price £1, accrued Div 10p. It goes ex-div tomorrow, the price drops to 90p and you sell for 90p but you get the 10p div on payment date so still receive  £1

Example B - Spread Bet

Today's price £1, accrued Div 10p. It goes ex-div tomorrow, the spread price to 90p and you sell for 90p but they've credited your ledger with the 10p div so there's no p&l.

Your question "how can you receive a div if you don't own the share?" is why I'm here. The only thing that makes sense to me is that IG hedge/cover their bets by owning the underlying and are simply forwarding the div. I'm not sure on that,  though, and I wanted to clarify here whether or not that's correct. 

If so,  then I'd say it's fine.

If not, then I'm with you that's its not equivalent.

I will keep looking into this and won't invest/gamble until I'm sure, as it does sound a little  "to good to be true" even if I can't explain in detail why. 

Example from IG Website:

Let’s look at some examples: 

You are long £10 a point of the FTSE 100 DFB at 4:30pm when there is a dividend adjustment that takes 7.8 points off the index. Our FTSE 100 DFB price drops by 7.8 points, so your running profit and loss (P&L) is reduced by 7.8 x £10 = £78. We therefore credit your ledger with £78, to negate this drop in P&L.

Jeremy535897

It would be worthwhile reading the thread I linked. The point on the dividends is that if you bet that X plc will go up 5p in a week, and it is !!!!!!-div 300p today and ex-div 280p tomorrow, any profit or loss will be based on the 280p figure not the 300p figure. You don't actually get the equivalent of the dividend. You just don't lose the bet simply because it went ex-div. But I could be wrong.

DoctorStrange

I couldn't see anything about dividends on it, but will read it properly this evening when I have time. 

In the meantime,  I've placed some dummy trades for stocks going ex tomorrow (SN, TW and PHNX)

I'll close them tomorrow after the div adjustment and see what's what. 

Thanks for info so far - appreciated 

pjcox2005

Just to check, although I expect you've thought of it, but for gains outside your ISA you still have your personal capital gains allowance of £12,300. If married that's two sets as well taking it to £24,600.
It may be that your investments are significantly high that it's already taken into account. In which case ISAs full and gains of £24.6k a year probably means you can cope if an issue arose on spread betting. Personally though I'd use my allowance and just making sure I'm utilising each year by selling assets held at a gain and reinvesting.

DoctorStrange

pjcox2005 said:

Just to check, although I expect you've thought of it, but for gains outside your ISA you still have your personal capital gains allowance of £12,300. If married that's two sets as well taking it to £24,600.
It may be that your investments are significantly high that it's already taken into account. In which case ISAs full and gains of £24.6k a year probably means you can cope if an issue arose on spread betting. Personally though I'd use my allowance and just making sure I'm utilising each year by selling assets held at a gain and reinvesting.

I'm not married and not making substantial gains unfortunately - but I could 😂

When you sell / reinvest,  isn't there a 30 day blackout period or something?

I'm only considering the spread betting as it seems less hassle (once I'm comfortable the returns on both at exactly the same, that it!)

DoctorStrange

Jeremy535897 said:

It would be worthwhile reading the thread I linked. The point on the dividends is that if you bet that X plc will go up 5p in a week, and it is !!!!!!-div 300p today and ex-div 280p tomorrow, any profit or loss will be based on the 280p figure not the 300p figure. You don't actually get the equivalent of the dividend. You just don't lose the bet simply because it went ex-div. But I could be wrong.

My understanding is you open a long at 300p, receive 20p in cash,  then sell at 280 (i.e. the bet has "lost" 20p, but you've gained a dividend so net zero)

Isn't that exactly the same as buying the share at 300p then selling ex-div at 280p, and getting the div on payment date?

DoctorStrange

Just in case anyone is interested