Spread betting vs CFD trading

On your trading screen, both products operate in almost the same way. With a contract for differences, you and a broker agree to settle a difference in cash. That amount comes from the market price when you open the trade and the price when you close it. FCA rules treat a spread bet as a contract for differences, structured as a gaming contract.

You don't buy any physical shares, currency or index with either account. You go long when you expect a rising price, and you go short when you expect a falling one. The table lists the core legal and tax rules.

Spread betting stays outside Capital Gains Tax unless wins come from carrying on a business trade you already run. HMRC places private betting and gambling outside the tax system. Every profit stays with you, and the bookmaker pays tax on the earnings from their business. The catch: losing money on your bets means you can't claim tax relief.

In almost every case, standard CFD accounts sit under the UK Capital Gains Tax rules. You pay tax only on net annual gains that go beyond your tax free allowance. For an individual that allowance is £3,000, and for a trust it's £1,500. A net CFD loss at the end of the year can be deducted from your other capital gains.

Trading UK shares on either account means no stamp duty reserve tax. The reason is that in neither contract do you ever own the underlying company shares.

Both accounts use leverage, which means you control a large position with a smaller cash deposit. This upfront deposit is often known as margin. For retail CFD traders, margin is usually 20% of the asset's value, from about 5% to 35%. Your broker updates your balance as the price moves, and may ask you to raise your deposit.

Overnight positions bring daily cash adjustments that act like borrowing money or owning shares. Consider HMRC's example: a long CFD position covering £100,000 of shares, backed by a £20,000 deposit. Your broker charges interest every day, on either the gross value of £100,000 or the net value of £80,000. When the underlying shares pay a dividend, an equal sum goes into your account, netted off against your deposit.

A short position runs the other way around. Interest is credited to you at a lower rate, and any dividends the shares produce must be paid back. A commission on contracts for differences is also charged by most brokers. Your net taxable gain or loss includes all of these commissions, plus interest charges and dividend adjustments.

Your own circumstances matter when you weigh up CFD vs spread betting, so think about how you deal with losses and tax. Private UK traders who'd rather not deal with tax paperwork, and whose gains might go beyond the £3,000 allowance, suit a spread betting account. Spread bets give no relief for losses, so they won't cut the tax bill you owe on a share portfolio you hold separately.

If you want trading losses to count against other capital gains, a CFD account is the one that fits. On the account, each debit and credit adds up to your net gain or your allowable loss once you close the trade.

Both accounts are offered by many FCA regulated brokers. Examples include ActivTrades, Capital.com, CMC Markets, FxPro, IG, Pepperstone, Spreadex and Vantage. Other registered firms, such as eToro and XTB, offer CFDs and share dealing but no spread betting. Applying for professional status means giving up retail client protections, so don't do that whichever contract you choose. Your cash sits in segregated accounts under FCA retail rules, and losses are capped at the amount you staked.