Modernisation of Stamp Duty

HMRC have announced a “Call for Evidence” on the “Modernisation of Stamp Taxes on Shares Framework”. If you deal mainly in the shares of public companies you may not know much about this subject – I certainly don’t. But the consultation document is very enlightening – see link below. That’s if you can understand it because this tax seems to be like capital gains tax – horribly complicated as it has been built up over many years and with a large number of exceptions.

It is of course called “stamp duty” because back in time the transfers of title actually had to have a postage stamp affixed to the document as evidence that tax had been paid, or be otherwise “embossed”. Wikipedia has a good account of the history of stamp taxes. In the past it was even applied to patent medicines, gold and silver plate, hats, gloves, solicitors licences, pawnbrokers licences, hair powder, perfumes and cosmetics. Perhaps we should thank that it is only applied to shares and property/land at present.

Here’s what I thought I knew about it before reading (other readers can correct me if I have anything wrong):

Public company shares are almost all cleared through Crest and subject to Stamp Duty Reserve Tax (SDRT) which is collected by the transacting stockbroker from the purchaser at the current rate of 0.5%. But if you are arranging the transfer of certificated shares directly from an existing holder (for example if you are acting as executor for someone who has died holding such shares) then until recently you had to physically visit the Stamp Office or post the transfer document to them so they could physically “stamp” it. The share registrar would not accept the transfer form without it being stamped first. Needless to say, with the Covid-19 epidemic rampaging, HMRC now accept emailed documents and electronic signatures instead which just about gets them into the twenty-first century.

Transfers of private company shares (or public company shares not in Crest – I recall there are a few), have to go through the same process. In the past this meant large deals could be delayed from completion while awaiting stamping.

But some shares are exempt from stamp duty. You don’t pay stamp duty on shares where the company is registered in a foreign country (outside the UK). But Wikipedia says this: “A unique feature of SDRT, compared to other purely domestic taxes in the United Kingdom, is that more than 40% of the annual intake is collected from outside the UK, thus creating an annual inflow of approx. £1.5 billion from foreign investors to the UK government”. This appears to relate to transfers of offshore (i.e. non-UK) investors, primarily US fund managers who operate depositary receipt or clearing schemes on which a higher rate of SDRT is paid.

The UK may be the only country that penalizes its investors for buying British companies – buying in a market outside of the UK isn’t subject to a charge, and neither are investments in bonds issued by corporations or the government.

However shares in AIM listed companies are also not subject to stamp duty as it was abolished in 2014 – with one exception – those of AIM companies that are “dual listed”, i.e. also listed on another recongized public exchange.

Certificated shares are also exempt in the following circumstances:

1. shares that you receive as a gift and that you do not pay anything for (either money or some other consideration)
2. shares that your spouse or civil partner transfers to you when you marry or enter into a civil partnership
3. shares held in trust that are transferred from one trustee to another
4. transfers that a liquidator makes as settlement to shareholders when a business is wound up
5. shares held as security for a loan that are transferred back to you when you repay the loan
6. transfer to the beneficiaries of a trust when the trust is being wound up
7. shares that someone leaves to you in their will
8. shares transferred to you when you get divorced, or when your civil partnership is dissolved
9. certain types of loan capital
10. shares valued at less than £1,000.

Such transfers still need “stamping” but with exemption claimed.

To quote from the consultation document: “Some of the most common Stamp Duty reliefs which customers claim relate to companies: intra-group relief; acquisition relief and reconstruction relief. Because the reliefs exist only in Stamp Duty and not in SDRT, anyone subject to SDRT who wants to claim those reliefs has to convert the share certificate into paper form from electronic form and submit that instrument for stamping under Stamp Duty. This creates administrative costs for both the customer and HMRC”; or complex work-arounds.

Note that Stamp Duty and SDRT are two separate taxes with slightly different rules. This undoubtedly creates confusion. HMRC does not have powers to enforce collection of stamp duty (but it does for SDRT) and there is nothing in legislation to say who is liable to pay it. However an unstamped instrument cannot be used as legal evidence.

There is another very big exemption from stamp duty and that is for “intermediaries” such as market makers. To quote from a 2015 paper by Prof. Avinash Persaud which is definitely worth reading (see link below):

“Comparing tax revenues and turnover suggests that a little more than a third of total turnover in UK equities; 37% is subject to the tax, and 63% of turnover is between tax-exempt parties. The principal exemption or relief from stamp duties on share transactions is a share purchase by an intermediary. The intention of this relief is that entities that provide liquidity to financial markets, by standing ready to buy or sell securities from others and accepting an obligation to trade when requested during the trading day, should be tax exempt. The intention of market makers is not to hold on to the security or make money from doing so but rather to facilitate trade; hence the payment of stamp duty is deemed inappropriate. Turnover between genuine market makers is significant, but it is a far cry from 63% of turnover. Prior to the advent of High Frequency Trading (HFT), approximately 20% of turnover used to be driven by market makers.

It is clear that in the UK, the intermediary exemption from stamp duty is being abused. It has become stretched to include activity that was not strictly intended by the law. The balance of the turnover of exempt parties, which is not genuine market making, is largely made up of High Frequency Trading (HFT) and the non-market making activities of intermediaries. Most significant is the turnover generated by intermediaries hedging in the share markets their end-customers’ activity in Contracts for Differences (CfDs), Financial Spread Bets (FSBs) or other derivative instruments. This is certainly not market making”.

A way for private investors to avoid stamp duty on share transactions is to use Contracts for Difference (CFDs) or Spread Bets. These are considered to be “derivatives” but why should they be exempt?

This raises the whole question as to why some transactions are exempt while others not. Why should professional investors not incur the tax while private investors do so? And why should derivatives such as CFDs be exempt? And why should high frequency traders be exempt? What is the logic behind these rules as they tend to encourage speculation as opposed to long-term investment.

But it seems that HMRC are not of a mind to consider the principles of these taxes, just some of the administrative issues.

For more information, see https://www.gov.uk/government/consultations/call-for-evidence-modernisation-of-the-stamp-taxes-on-shares-framework ; and

Persaud Paper: http://www.stampoutpoverty.org/live2019/wp-content/uploads/2015/04/Closing-the-loophole.pdf

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )