CFDs investments - Saving Tax
The first point to note is that as CFDs are chargeable to CGT, any losses would also be allowable. Therefore losses incurred on CFD investments would be available for offset against other gains in the tax year - eg gains on share disposals.
There are a number of uses for CFDs although the tax implications are closely linked to your particular trading strategies.
One use is to sidestep the provisions that prevent Bed & Breakfasting of shares. This is where shares are sold one day and bought back the next in order to create a loss or to utilize the annual exemption.
The IR prevented this by stating that any repurchase of the shares in the next 30 days following the disposal would be matched with the disposal, effectively meaning that the shares were deemed not to be sold at all. However, many investors use CFDs to circumvent this.
By repurchasing shares in the form of a CFD, it would allow you still have a position in the shares during the 30 day period, and you could then repurchase without having lost out on any growth in value of the shares and without the bed & breakfast anti avoidance rules applying.
Example
You own shares that are standing at a small gain e.g. £5,000 or even at a loss. Prior to the end of the tax year you could dispose of the shares and crystallize the
- loss
- or gain. If a gain you may have the annual exemption to offset to eliminate the gain. If you could repurchase the shares you would have secured a CGT free uplift in value
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You then purchase a CFD for the same number of shares. After 31 days you then sell the CFD position and repurchase the regular shares. By using CFDs you've always held position in the shares so it doesn't matter what the share price does. If it rockets then profits will be built up on the CFD trade to offset re-buying the shares at a high price. But if the shares slump then the loss on the CFD trade is offset by the cheaper price of the shares when they're bought through the stockbroker.
You would however, have crystallized the loss or enabled the offset of the annual exemption to reduce your overall tax charges.
You could also use CFDs to hedge against price falls and this short selling is a useful method for managing your liability for CGT liability.
In particular you can sell CFDs against an existing holding allowing you to control the time at which you crystallize capital gains or losses. This can also be useful for ensuring correct offset of losses and utilization of the annual exemption.
As an example, if you owned shares with a substantial gain but which are expected to fall short term. Rather than disposing now & missing out on future gains and the benefits of CGT taper relief, you could sell a CFD and then close your position in a few weeks. Assuming the shares fell in the period, the gain on the CFD would be offset by the loss on the shares. In addition if this was around the year end the closing of the CFD position could be arranged to be in the next tax year.
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