Spread betting as an Investment in Ireland
One thing about living in Ireland is the really high tax rates compared to the UK. Deductions are 52% once you hit €34k, which is crippling as the limit is so low. Compared with the UK, where you can earn £50k.
On investment income, you pay 33% Captial Gains Tax and income tax on dividends. If you are higher rate, then your deductions are 52%. You get an allowance of €1270 a year tax-free on capital gains. This is poor compared to the UK where you can earn £12300.
One way to get around paying tax on investments is spread betting. Depending on what you invest in, it could be better for you. As it’s betting, there is no tax (and no deductions for losses). If you only “go long” betting on shares/ funds to rise, then it’s identical to buying the underlying asset. You make money if the share price goes up and lose money if the share price goes down.
In this example, the true share price is £426.00. You can buy at 426.33 or sell at 425.37. If you want to buy, you place an order say for £10 a point. So if prices rises above £426.33, you start making money, £10 for every £1 the share goes up. If it doesn’t though, you lose money.
The main difference is the tax and the fees. To simplify matters, assume your annual allowance has been used up elsewhere. If you make €1000 spread betting, you get €1000 you can spend. If you make €1000 on share gains, you pay 33% and so have €670 to spend. A big difference from a tax point of view.
In terms of fees for buying, these vary depending on the asset you buy. For example, UK shares might cost you £10 dealing fee, the spread and 0.5% stamp duty whereas an American share might be commission-free and you just pay the spread. (The spread is the difference between the buy and sell price, if this is a high volume liquid market, it will be small but could be big depending on what you buy).
For spread betting the fee is in the spread and the overnight interest costs. Basically, you can do 2 types of spread bet, one that is funded daily and you have to pay interest on your overnight position. Its quite small, 2.5% annually so 2/365% a night but it will add up. The other bets you can have are quarterly bets. So you can have bets expiring in September 2021, December 2021 and March 2022. These work in a similar way but there are no funding costs. You pay for these in terms of bigger spreads.
Look again at the HSBC screen. You can see the prices for September 21, December 21 and March 22. As the time goes out longer the bigger the spread. For example, for March 2022, the spread is 5.18. If you put £10 on a point, the cost of this trade is £51.80. That’s all you pay and it’s built into the price. It is hidden but still there. If you wanted to get the same exposure via buying, you’d need to buy £4260 worth of HSBC stock which would cost, says £10 dealing fee and £21.30 in stamp duty. So £31.30, which is less than £51.80 for doing the spread bet. Where spread betting wins is that if you don’t pay the tax if you are right.
You can find out more about spread betting at IG. I have an account there but not affiliated in any other way with them.
Take note of the warning across the site
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
If you only ever “go long” and never leverage, its identical to buying shares/ funds but with no tax.
Ability to short stocks in Ireland.
One thing spread betting allows me to do is to ‘short’ stocks. If I think a stock will go up, I can just buy it and profit from it. If I think a stock will go down, it’s not as obvious how you would profit from that. With spread betting, you can just sell the bet. The downside is huge though if you would have sold Gamestop or AMC as a spread bet, you’d have lost a huge amount and probably would have been margin called at some point (this is where you have to settle up some of your accounts or they will close your trade).
A safer way to short stocks is to buy “put” options. I looked into this but as gains are taxed at 33%, spread betting is superior even though slightly riskier. If you buy a put option, you can only lose your premium. You can also sell “call” options but these leave you open to the same downside as spread betting if the price goes up.
Spread betting is a tax-efficient way to play the stock market. The risk is identical to buying shares if you don’t use leverage. Its more flexible in that you can short stocks too. If you prefer investing in funds or ETFs, you can spread bet on those. For example, Cathie Wood’s ARK funds are not available to Irish investors but you can get the same exposure by betting on them.
The downside is that you can only do quarterly bets up to 9 months ahead so you have to roll over your bets or place new ones. Its a not a simple, set and forget like Index investing is sold as. Fees can also be high but the tax saving should offset that. Also, leverage can kill your investments too. Be careful if you are trading on margin. I’ll do a follow-up post about spread betting as an alternative to an ETF.
Big disclaimer here, I am not a financial advisor, please do your own research before committing anything. 71% of retail investors lose money.