Q. Dear Josh, what does a hike in capital gains tax mean for spread betters?
A. We don’t yet know what will be announced in the emergency budget on 22 June, but the good news is that even if there is a hike, this should make no difference to spread betters. Suggestions from the coalition government indicate that capital gains tax (CGT) could be hiked up to as much as 40 per cent from its current level of 18 per cent. But, because spread betting is not currently subject to CGT, if the government does decide to hike the rate then this could potentially make spread betting all the more popular and draw in new traders who may not have considered the practice before. Because spread betting is exempt from CGT this means that should you make £5,000 on a Vodafone trade through a spread bet you get to keep all of it. Currently, if you had made these gains by trading the actual Vodafone shares, and if you were already over your £10,100 CGT allowance, you would have to pay 18 per cent of your profit – or £900 – in tax. Should CGT rise to 40 per cent, then you would have to pay £2,000 in tax, which may well leave you quite disheartened.
Its tax advantages is one of the factors that makes spread betting so popular. While there is of course a chance that the rules could also change for spread betting, if they remain the same traders would have nothing to worry about from the looming hike in CGT, unlike traditional investors.
Q. Dear Josh, what is sentiment like in the markets now that the FTSE 100 has bounced from its recent lows?
A. Sentiment remains fragile after what was a volatile trading month in May. However, strong gains in the FTSE 100 and other global indices last week have gone some way to repair investor confidence. The markets fell sharply in May, mainly due to the high amount of uncertainty and fears that the European sovereign debt crisis could impact the global economic recovery. We must remember that these fears still exist and could come back to haunt the markets. But what has changed over the last few days is that investors have calmed down somewhat, assessed stock prices that have fallen significantly, and have been enticed into buying again. As last week progressed, investors gained more confidence as the bounce in stocks continued, a shift which helped investors to return to other risky assets too, having avoided them during the worst of the market sell-off. When investors actively seek risk this usually means equity indices start to move north again. However, for sentiment to remain positive, gains need to be sustained over a number of weeks. If traders lose their nerve and take profits early then this would send out a signal that they remain concerned about the Eurozone.