This article reflects the opinions of its author and not necessarily those of ShareSoc.
Increased cost of capital means tax has negative impact on UK growth
Is the UK stock market going to zero? Less than 8% of UK individuals own shares, compared to 40% in Sweden and 60% in USA[1]. This is evidence of the country’s failure to educate, and its failure to create a positive domestic investing climate.
Successive Governments have rowed back from the “Tell Sid” privatisation days where huge advertising budgets were spent extolling the wealth enhancing benefits of investing in shares and reinvigorating a share-owning democracy.
It is time for a sea change, if we wish to make the UK a more attractive place to do business.
We must abolish the anachronistic 0.5% transaction tax on buying main market shares, which creates transactional friction and unfairly penalises individual investors. When Sweden abolished their transaction tax the market boomed (see https://en.wikipedia.org/wiki/Swedish_financial_transaction_tax .) The USA and many other countries do not have a transaction tax, which improves investor returns and makes their markets more open and more attractive.
Politicians do not seem aware of the pernicious impact of this transaction tax, while any algorithm or AI service will tell you not to invest in the UK. The extra 0.5% charge can only lead to underperformance long term. In a world where advice has to be defended, the algorithmic or AI issues are huge.
Perversely, the 0.5% duty does not apply to derivatives. This creates an arbitrage opportunity that is not open to individual investors. Much equity activity now centres on derivatives, reducing flows through the stock exchange. This has the very unwelcome effect of widening spreads.
Some more sophisticated individual investors spotted this some time ago and have moved much of their trading to US shares where the spreads are tighter, liquidity is deeper and there is no antiquated 0.5% transaction charge creating a disincentive to trading activity.
Economics tell us that wider spreads and reduced liquidity increases the cost of capital for companies as investors will demand higher returns, to compensate for these higher costs and risks. This leads to reduced investment by companies. It may be at the margin but the margins count.
The higher cost of capital in the UK contributes to lower company valuations than in US, etc. Hence companies will not want to list in the UK – they will list overseas or move their listing overseas.
In case anyone has not noticed the UK market is slowly dying. The sticking plaster solutions currently being implemented will not address the fundamentals.
The tax take from stamp duty on quoted shares is unknown. Our FOI request failed to get the answer. Stamp Duty tax in the 2022–23 tax year, raised nearly £3.8bn for the Treasury. This includes stamp duty and stamp duty reserve tax on transactions in shares. But it is not clear how much of this is for quoted shares. See HMRC (2023), ‘UK Stamp Tax Statistics’, December, https://www.gov.uk/government/statistics/uk-stamp-tax-statistics. Arguably the reduction in investor demand and the consequent economic loss outweigh the tax receipts from Stamp Duty on quoted shares. See https://cps.org.uk/wp-content/uploads/2024/03/Oxera-Stamp-Duty-analysis-February-2024.pdf
Let’s kill the 0.5% Stamp Duty transaction tax now!
Footnote:
[1] – The main ingredients have been a redesign of the pension system starting more than 30 years ago, a high level of retail engagement in capital markets (around 40% of Swedish adults have a simple and tax incentivised investment account called an ISK, compared with less than 8% of UK adults having a stocks and shares ISA), a deliberate government programme to support the development of capital markets, and tax incentives to encourage the development of tech and growth company clusters.
See New Financial Report on the Future of Smaller Company Capital Markets.
Cliff Weight, member of ShareSoc and ShareSoc Education and Policy Committees, former Director.
Part of the answer is at your links. Specifically https://www.gov.uk/government/statistics/uk-stamp-tax-statistics/uk-stamp-tax-statistics-2023-to-2024-commentary#stamp-taxes-receipts
“stamp taxes on shares and other liable securities (SDRT and SD) receipts have fallen by 15% from £3,775 million to £3,200 million between 2022 to 2023 and 2023 to 2024
Stamp Duty Reserve Tax (SDRT) receipts decreased by 11% from £2,585 million to £2,295 million”
Given the way SDRT works, almost every penny of SDRT will be on listed shares.
Stamp Duty does arise on unlisted shares, but my expectation as a retired tax adviser is that most of it will have arisen on sales of certificated listed shares.
For large transactions in unlisted shares, I believe there is still significant scope for tax avoidance, despite lots of measures to make avoidance harder.
To summarise, I think most of the figures above related to listed shares. This is a serious amount of tax revenue to ask the Government to give up when it is under budgetary pressures.
Because Stamp Duty (SD) is charged on instruments rather than transactions, transfers that do not require the execution of a written instrument are outside its scope. For this reason, Stamp Duty Reserve Tax (SDRT) was introduced to tax ‘paperless’ transactions in shares which otherwise escaped charge.
Electronic transactions are usually carried out through CREST , which automatically collects Stamp Duty Reserve Tax and sends it to HMRC . Stamp Duty Reserve Tax is payable at 0.5% rounded to the nearest 1p.
Most people now hold their shares via platforms so their transactions are carried out via Crest. I thought less than 10% of quoted shares are owned in paper certificated form (I think Flint had some data on this).
I agree with Amin about the £2,295m figure for SDRT in 23/24.
Stamp Duty receipts reduced by 24% from £1,185m to £905m. in 23/24. I expect that only around say £200m or less was from quoted shares. So we are talking about £2.5 billion in total from this tax- a serious amount of money for the Government to give up and a swap from guaranteed income now to possible savings later. As Amin says, this is difficult when there are budgetary pressures. Nevertheless I still think it is the right thing to do.
Of course the 24/25 figures will be higher as many people cashed in their capital gains before the budget to try and avoid higher rates of cgt. I presume they then had to purchase shares and pay Stamp Duty. Of course they may have bought overseas shares and avoided the stamp duty tax. We will have to wait until the data is published to find out.