Spread betting unremitted funds could be a winner!

The issue

Many non-domiciled individuals have been subject to the remittance basis of taxation. Put simply that means that offshore earnings are only subject to UK tax when they are brought to the UK. There are also all sorts of complicated rules which ‘trace’ offshore earnings so that it is difficult to turn them into something else and so they will be taxable when they enter the UK, no matter what form they take.

 

Spread betting

For the uninitiated a spread bet involves entering into a contract with a firm whereby either they will owe you money or you will owe them money depending on the outcome of a particular event.

 

Example

A spread betting firm are offering a spread of 18-20 on Tiger Woods’s finishing position in the US Open. I don’t think that he will do well in this event so I buy at 20 for £10 a point. If Tiger were to finish 30th then I would win £100 (10 x £10) but if he were to win then I would lose £200 (20 x £10).

 

Remittance basis of tax meets spread betting

Let’s now imagine that I have £10,000 of unremitted income in a Jersey bank account and I have a credit account with an offshore spread betting firm. On my first bet I lose £200 and so I pay the firm £200. This cannot be a remittance as no funds have entered the UK. On my second bet I win £200 and the firm pays me in the UK. This is a tax-free receipt from gambling which is not a remittance of funds. How can it be? The £200 arose from the contingent agreement that I had with the spread betting firm and was nothing to do with my unremitted funds.

Now let’s say that I randomly bet on the direction of the FTSE 100 and win about half the time (and clearly lose the other half). Each time I win, the firm pays me in the UK and each time I lose I pay the firm with my offshore funds. On average (and ignoring the spread betting firm’s margin) by the time I have lost £10,000 I will also have won £10,000. I will therefore have £10,000 sitting in the UK with no tax due. Clever heh?

 

Final word

Although I believe the above technical analysis to be correct HMRC would probably seek to attack cases of abuse. It is however an interesting case study for remittance basis clients who are avid gamblers!

 

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