ISA vs. Spread Bet21 Mar 2021 07:45
Matt
An alternative to sticking £20k in an ISA, is to open a spread bet with IG (gains on spread bets are also tax free). A spread bet essentially enables you to leverage your money.
For example, a spread bet on Avacta @ £200 per point at an opening price of £2.70, is the equivalent of buying £54k of Avacta shares (200 x 270). The margin on Avacta to fund such a bet is 25%, so you would have to fund your IG spread bet account with a minimum of £13.5k (25% of £54k - in reality, you would stick the whole £20k in IG, since you want to keep a healthy buffer in there, to cover any significant short term dips in the share price).
In the above scenario, were Avacta’s share price to increase by 50%, your spread bet would have made you £27k profit (50% of £54k), whereas your ISA share purchase would have made you £10k profit (50% of £20k).
For me, having become familiar (and comfortable) with spread betting over the last 12 months, it’s an absolute no brainer. The only extra cost involved in a spread bet, is the interest you pay to keep the bet open. That works out at approx 2.5% per annum on the amount you have ‘borrowed’. In the above example, you are deemed to have borrowed £54k, so the annual interest on that bet would be approx £1350 (or, £3.70 per day). When you consider the potential £27k tax free gains in our example, the interest payment becomes quite a trivial consideration.
Of course, with a leveraged trade such as a spread bet, the losses are amplified if the share price goes in the opposite direction. So, in the extremely unlikely scenario where the share price drops by 50%, the losses are 50% of £54k, rather than 50% of £20k.
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