Forex trading is hard enough, without having to worry about all of the possible tax implications and rules that we need to be aware of. As a forex trader, you could stay as a sole trader, or perhaps trade through a limited company. Which one is best for you?
You are able to trade forex through a limited company in the U.K. It’s worth consulting an accountant that specialises in derivatives trading beforehand. The account will advise whether this is the most tax efficient option for your situation.
Trading Forex With A Limited Company In The UK
It is legal to trade forex with a limited company structure in the UK for both UK residents and non-residents. This is because the United Kingdom follows the “arm’s length” rule for taxation of trading profits.
What this means, is that if you trade forex (or any other financial instruments) through your company, you are still responsible for paying tax on any profits earned. However, these profits can be offset against any losses made during the year.
Of course, there are also some key drawbacks that you must be aware of if you choose to trade forex through a limited company. We would advise speaking with an accountant before making the decision, as they know your situation best and can help advise if this is the right decision for you.
There are some very good accountants out there that specialise in trading, so it’s definitely worth having a consultation. If you are not profitable, as 80% of traders aren’t, it’s worth waiting until you reach profitability before sorting this out.
Using SpreadBetting As An Alternative
Instead of setting up a limited company, a lot of traders in the UK look to spread betting instead. You may have not heard of spread betting as it isn’t very talked about in the industry. The reason for this is the most popular forex traders online most likely wouldn’t need to worry about tax, as they aren’t actually trading!
Spread betting is tax free in the U.K as it is classed as a gamble, rather than investment, which is what trading is classed as. It’s still worth consulting an accountant before jumping into spread betting but you won’t be paying stamp duty or capital gains tax on profits.
If you were to stick to trading as a sole trader, and using spread betting as an option, it will come down to what type of tax relief you can get. You will need to ask your accountant about this before making any decisions. As they’re the expert in these matters!
The drawback of spread betting is when you’re actually trading CFD’s, losses are able to be offset against capital gains tax, which will prove extremely useful. However, this is still potentially not as favourable as spread betting.
In Conclusion – Is It Worth Setting Up A Limited Company In The UK, As A Forex Trader?
In summary, the benefits of setting up a limited company to trade forex depend on your personal financial situation. Here are some key points to consider:
– The tax relief you get on trading profits through a limited company may not be as favourable as simply using spread betting.
– If you’re not profitable, you should not worry about speaking with an accountant until you reach consistency.
– You could save money by using spread betting instead of a limited company, such as not having to pay stamp duty or capital gains tax on your profits.
It’s definitely worth consulting a specialist who knows forex trading back to front before setting up a limited company.
How do you structure your forex trading business? Let us know in the comments below..