Can active traders benefit from the new 18% CGT rate?

[donaldduke]

There are a couple of existing threads on T2W regarding income tax and Capital gains tax and which of these are applicable to active traders.

Some believe that active trading as your main source of income will be treated as Income tax.

Generally i think asking your local tax office for advice is a bad idea. There is good chance that they will give you biased advice and you could end up paying too much tax.

Every case is unique and most of the time previous case law is used to assess which category you will fall into.

After reading the following from the IR website.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM65701.htm

I was left under the impression that if you trade stocks or futures or options speculatively (betting on direction), regardless of how often, you should fall under capital gains tax.

If you are a hedger, or if you are a market maker trading for the bid ask spread, or an arbitrageur its likely to be income tax.

I am not a tax expert and will be taking professional advice before April to see if i can claim CGT.

 

[the blades]

There are a couple of existing threads on T2W regarding income tax and Capital gains tax and which of these are applicable to active traders.

Some believe that active trading as your main source of income will be treated as Income tax.

Generally i think asking your local tax office for advice is a bad idea. There is good chance that they will give you biased advice and you could end up paying too much tax.

Every case is unique and most of the time previous case law is used to assess which category you will fall into.

After reading the following from the IR website.

http://www.hmrc.gov.uk/manuals/bimmanual/BIM65701.htm

I was left under the impression that if you trade stocks or futures or options speculatively (betting on direction), regardless of how often, you should fall under capital gains tax.

If you are a hedger, or if you are a market maker trading for the bid ask spread, or an arbitrageur its likely to be income tax.

I am not a tax expert and will be taking professional advice before April to see if i can claim CGT.

good question and I'm sure many will be interested in what you find out.

UTB

 

[Jack o'Clubs]

Using current examples / guidance might be misleading given the rule changes. As I wrote on the other thread, now that everyone is incentivised to push income into capital as much as possible, what price HMRC change some of the rules on intrepretation, including with traders? I wouldn't be surprised to read more threads on here after April next year complaining that HMRC have insisted that their activities constitute an income rather than a capital gain. We shall see...

 

[donaldduke]

Using current examples / guidance might be misleading given the rule changes. As I wrote on the other thread, now that everyone is incentivised to push income into capital as much as possible, what price HMRC change some of the rules on intrepretation, including with traders? I wouldn't be surprised to read more threads on here after April next year complaining that HMRC have insisted that their activities constitute an income rather than a capital gain. We shall see...

Any major change to the HMRC guidance will need to be backed up by changes in the law explicitly regarding trading profits.
HMRC can try it on, but if existing case law is on the side of the trader then a simple appeal to the independant tax commisioners will soon put them in their place.

 

[police]

Trading Income
or
Investment Income

That in a nutshell is what it comes down to.

If you are a professional trader and alreading paying tax on "TRADING" income , then you have almost zero chance of having that reconsidered to be INVESTMENT income.

If you a part - time with an alternative , and main source of income, then you have a shot claiming that your extra earnings fall under CGT

 

[donaldduke]

Trading Income
or
Investment Income

That in a nutshell is what it comes down to.

If you are a professional trader and alreading paying tax on "TRADING" income , then you have almost zero chance of having that reconsidered to be INVESTMENT income.

What exactly is your definition of Trading Income? The HMRC article i referenced includes a definition of trading income based on case law that states directional trading by an individual is likely not trading income. But hedging and spreading and arbing are probably trading income. The article even states that if the facts change then even a former pro trader can change status.

"...They should still be considered to be trading given their background and involvement in the derivatives market, if there has not been a significant change in the nature of the activities. In cases where there has been a significant change in the nature of their activities, then a decision should be reached on the basis of the facts of the case."

If anyone has any other statute or case law references i would love to see them.

 

[FUTEX]

At Futex, we have had considerable and very expensive tax advice, covering this very subject some time ago. Believe me, it is not easy to suddenly claim that you wish to change the status of your trading / investing. Even the word trading infers a trade, and as such, suggests "income". There are ways of presenting matters to overcome this. For further help on this subject you will need to send a private mail, or contact Futex at our webite futex.co.uk as it would take hours to explain the nuances of CGT on this forum.

 

[timsk]

There are a couple of existing threads on T2W regarding income tax and Capital gains tax and which of these are applicable to active traders.
Some believe that active trading as your main source of income will be treated as Income tax. After reading the following from the IR website. . .
Share transactions: by individuals and companies
. . . I was left under the impression that if you trade stocks or futures or options speculatively (betting on direction), regardless of how often, you should fall under capital gains tax.

Belated thanks to DD for posting this - especially the link.
I've recently given up a 'normal' full time PAYE 9-5 job in order to trade full time and wrote to HMRC on the 18th February last asking for clarification on my tax status. Attached is my original letter to them and their reply. For those that don't have the time or inclination to open the attachments, the upshot is that I will be subject to CGT and not income tax. I've blotted out personal details for obvious reasons.
Tim.

 

[grantx]

Tim,

The implication as stated is that all traders don’t pay tax, only CGT. I would be willing to bet this incorrect. But note I am not contradicting the advice of the Inland Revenue.

For all intents and purposes you presented your case, on which the IR seem to have based the appropriate advice, as another Joe Public with a joint account with his wife buying/selling investments which thus attracts CGT. However, you need to demonstrate that you are a bona-fide trader and this is your sole occupation.(FSA authorisation as a sole trader would be one way). Then you will be able to claim all reasonable business expenses (doesn’t include jollies in the Caribbean to meet your accountant who lives a few doors away).

Grant.

 

[fifty2aces]

Tim,
However, you need to demonstrate that you are a bona-fide trader and this is your sole occupation.(FSA authorisation as a sole trader would be one way). Then you will be able to claim all reasonable business expenses (doesn’t include jollies in the Caribbean to meet your accountant who lives a few doors away).

Grant.

Actually, it would probably be better to avoid being treated as a sole trader, as while Income Tax does allow more deductions, it has a higher top rate (40%, compared to 18% for CGT). Obviously you're at the mercy of HMRC, who might realise they could get more money from you if they subject you to income tax, but no need to encourage them...

Bottom line is, as always, seek professional advice. I'd be interested to hear what kind of tax the guys trading their own accounts in arcades are paying though.

 

[grantx]

Fiftytwo,

I'm not sure how the figures would stack up but if someone is a self-employed/indepenent trader trading through an arcade, I reckon allowable expenses like desk fees, clearing fees, etc could make the income tax route preferable. However, a trader working from home without the same overheads (excluding a price feed feed) may well be better off the CGT route.

One thing to bear in mind is how the IR view your situation. You may opt for the CGT route but when tax returns are filed I reckon they'll assess you as being a "professional" trader subject to income tax. This may appear to conflict with what I said above regarding convincing the IR of one's status - trader or investor (especially with regard to allowable expenses)or otherwise. I think they'll decide on the status which yields them the max.

Grant.

 

[donaldduke]

I think they'll decide on the status which yields them the max.

This may be true, but you can always appeal the decision to the independent tribunal (Commissioners) and you will get an unbiased decision from them based on Case law. And the case law favours being liable to GCT not Income Tax (see orignal link).
Ive read that HMRC often back down quickly when you say are you going to appeal a tax decision you think is wrong. ie They apply the rules to yield the max amount of tax but if the Taxpayer kicks up a fuss they have to re assess the situation otherwise they risk being Humiliated at the appeal.

 

[grantx]

Donald,

That's interesting - I've never heard of the "independent tribunal ". I've always assumed the only people who challenge thr IR are the incredibly wealthy or the incredibly stupid; the IR losing a case is always headline news, ie it's pretty rare.

Grant.

 

[grantx]

Donald,

That's an excellent link for resources. I've expanded this which should be of interest:

HM Revenue and Customs: manuals index page

Especially:

avings and Investment Manual: Manual Contents

Grant.

 

[DemonHeadmaster]

Are there any traders here who have taken the Sole Trader ---> Ltd Company route?

The overall tax bill at the end of the year is lower with a Ltd company, however i've heard it's harder to claim back costs (no more 'business meetings' in the Bahamas!) and any spare cash in the account has to be left in there (though some of it can be paid out through dividends, i think).

I've also heard you don't have to pay up to 50% of the following years earnings upfront like you have to
as Sole Trader.

Any advice would be greatly appreciated.

Thanks,
DH

 

[glynnt]

Are there any traders here who have taken the Sole Trader ---> Ltd Company route?

The overall tax bill at the end of the year is lower with a Ltd company, however i've heard it's harder to claim back costs (no more 'business meetings' in the Bahamas!) and any spare cash in the account has to be left in there (though some of it can be paid out through dividends, i think).

I've also heard you don't have to pay up to 50% of the following years earnings upfront like you have to
as Sole Trader.

Any advice would be greatly appreciated.

Thanks,
DH

I was under the impression that spread betting was not subject to tax as its considered to be gambling? Thats what all the sb firms like to tout anyway. Are you making a distinction here between part time sb'ers and full timers? i.e. treated differently by the revenue?

 

[DemonHeadmaster]

Your right, spread betting is not subject to tax. I was thinking more in terms of trading futures for a prop shop. The traders are classified as self-employed and have to file their own tax returns. Most file under the sole-trader status and I was wondering if there are traders here that have gone down the Ltd Company route...?

 

[Joey25]

My understanding was that if you have a fully-backed deal at a prop shop you earn a "commission", so you pay income tax and potentially VAT aswell if you get above the 60k-ish threshold.

Do you think it would be then possible to go it alone at home and claim to be someone who is "not employed" but who earns some cash speculating on futures subject to CGT allowances and tax?

 

[jcwonder8]

Looking at the materials I think the case law and guidance suggests that if you are a sole trader trading directionally then you are speculating and as such subject to the CGT regime (however active you are in the day) but if you are in an arcade providing liquidity by playing both sides of the bid and ask acting almost as an electronic market maker and profiting irrespective of material directional movement then it looks like trading and subject to income tax. I wonder if any arcade traders could comment - must be a grey area between acting as the market maker and directional scalping.
Cheers
JC