HELP! UK tax basics

[deluder]

Please tell me how FOREX profits are taxed in the UK.

I.e.

John opens a new £3,000 trading account at the start of the UK tax year and by the end of the tax year its value through trading has risen to £10,000. John likes how things are going and decides not to withdraw any money from the account.

Is the profit:

a) taxable as trading income,
b) taxable as capital gains or...
c) not yet taxable as John has not withdrawn any funds fromt he account?

Thanks so much for your help!

danny

 

[rpaco]

I would think that in the UK its actually classed as gambling and so not taxable as income, however it can be taxed as capital gains.. UK capital gains personal allowance is £9200 this year and £9600 for 2009/10. Then the amount of gain above the allowance is taxed at 18%. One of our lower taxes!! In your example for instance no tax would be paid on the gain of £7k But if next year you had make the highly unlikely profit of £10k ie your end balance is £20k , you would be liable to tax on £400 of it @ 18% ie. £72 tax.
I am sure that someone out there (one of the 5%) knows and has actually made and paid in the UK , I am just guessing from various bits I have read.

 

[MaxDoom]

Deluder,

this is an interesting question which I have been discussing withthe inland revenue but as yet not got a clear answer. The following are facts though:

1. If it is classed as betting then it is free of ALL tax. Spreadbets have this advantage, and with their spreads getting tighter on FX it might be the way to go.

2. If it is your main income, then IR will declare you a professional investor and you will have to declare the proceeds on a tax return and pay tax in that way - not capital gains.

3. If number 2 does not apply and IR confirm it is taxable then it would be capital gains and the gain is realised when the trade is closed.

hope this helps I will update if I ever get an answer for IR who did actually confirm that CFD trades are taxable the same as share trades.

 

[rpaco]

There you see, I thought someone would know!
Presumably "main" would be if your FX trading gain was bigger than any one other source of income. (even by £1)

Personally I use Capital spreads, whose spreads are tight on majors. They do quote at least one pair in both directions, interestingly with different spreads! But the minimum stake is £1/pip. So the effective gearing is high, But you dont need £20000 to start. They are not perfect though.

 

[deluder]

Thanks lads...

Thanks lads...

Alpari have got back to me to say it is taxable as CGT but then I did not suggest to them that it would be my main source of income, which would be nice one day.

Some further Qs:

a) How is the account taxed if all of the account balance including profits from earlier trades is tied up in an open trade (1:1 leverage) at the end of the financial year? Would this defer tax liabilities until following years?

b) Maxdoom, do you agree 'main' source of income would just be the highest amount?

Thanks again...

Danny

 

[rpaco]

Won't make any difference, once the gain is declared in your tax return you owe it .
but you may be able to use some of last year's allowance or next years. You need a tax accountant. My neighbour is self employed and all his tax affairs are done 2 years in arrears.

First you have to become one of the 5%!!

 

[deluder]

Won't make any difference, once the gain is declared in your tax return you owe it .
but you may be able to use some of last year's allowance or next years. You need a tax accountant. My neighbour is self employed and all his tax affairs are done 2 years in arrears.

First you have to become one of the 5%!!

Yeah you're right, but I can't get one right now so could you be so kind as to give me a little bit more of a clue about how I might access previous or future year's capital gaisn allowances, or do my tax 2 years in arrears?

d

 

[rpaco]

No sorry I have spent some time on the HMRC website but could not find it. Found a lot on CFDs and gambling though. Suggest you ring them yourself. BTW you have gone past last year's (2007/08) deadline for paper returns for PAYE submissions but can still do it online if you are registered.
Strongly suggest you go and see an accountant.

 

[gringo]

Hi all.
Im also interested in this topic and the main Q remains unanswered
At what stage should the income be declared?

Yearly together with final "tax return" or maybe:

the income is not yet taxable as John has not withdrawn any funds from the account?

In my view all income stored in broker's account remains potential profit until you withdraw funds to your personal bank acc. Compare it to share dealing. You buy shares paying $1 a share, it raises 10 times, potentially you've made $9 profit but it stays untaxable until you sell the shares and money goes to your bank account. If you decide not to sell next day it may convert into potential loss.

But in this case if you made a loss on your fx acc should you withdraw funds to declare that loss?

So once again: At what stage should the income be declared?

What do you guys think?
best
gringo

 

[Cesil]

I've had this out with HMRC last year. FX income used to be a grey area several years ago, but no longer. FX trading is NOT classed as gambling (although spread-betting is), nor is it classed as capital gains. They treat it as normal income, which you will need to self-certify in addition to your normal wages and any other income you make in a given year (if applicable). If the profit you refer to is locked in (ie the profit does not relate to open positions & all made in the current tax year) you are liable to pay tax on it, whether you withdraw the money or not.

Makes sense really, if you forget that its money you're trading, & think of it as buying X product & selling it for Y profit in a shop...