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Stamp Duty on Shares

17/03/08

Laurence Seeff is Head of IAQ™ Training at BPP Professional Education’s Financial Services Faculty. He currently teaches towards the Investment Administration Qualification IAQ™ and the SII Certificates courses. Prior to working at BPP, Laurence spent almost two decades of his career at Bloomberg Financial Markets.

Background of Stamp Duty

Taxes on the transfer of property between individuals have long been a part of the taxation armoury of successive governments in the United Kingdom. Ask a layman about stamp duty and he would probably describe the tax paid when buying a house. Unfortunately for investors in shares, it also applies to them!

By who is it paid?

This tax is paid by the purchaser, BUT NOT THE SELLER, of shares and is based upon the ‘consideration’ defined as the number of shares bought multiplied by the price. The calculation excludes broker fees and commission. 

How much is paid?

The rate of stamp duty on shares has varied considerably over the years but has been set at ½% since 1986. Prima facia the calculation would seem to be easy by calculating ½% of the consideration. However, when the deal concerns ‘certificated’ shares (those represented by physical certificates and transferred using a ‘stock transfer form’) the resulting amount is then rounded UP to the NEXT £5. However, as long ago as 1986, the government recognised that shares could be transferred electronically (ie paperless) without the need for a stock transfer form and so they introduced ‘son of Stamp Duty’, known as Stamp Duty Reserve Tax (SDRT). The tax rate is the same at ½% but the resulting figure is rounded to the NEAREST penny and not up to the NEXT £5. SDRT is also paid on an option to buy shares as well as where an investor purchases (someone else’s) rights arising from shares - such as those under a ‘rights issue’.

As an example, if you bought 1,000 shares at £3.01p you would pay £15.05 SDRT (1,000 x £3.01 x 0.005 = £15.05) but would have to round that figure up to £20 if you did the same deal in ‘certificated’ form. 

What or who is exempt?

Instruments that are exempt are foreign registered stocks and new issues of securities to the original owner. In addition, bearer stocks are exempt although, when shares are converted into bearer depository receipts (such as ADRs), HMRC levy a one-off 1½% tax on the conversion which is in lieu of SDRT. (As well as shares, the taxes are also paid in respect of some bonds, although gilts and sterling non-convertible UK loan stock are exempted). In addition to the instruments above, certain types of purchasers of shares are also exempt. These are market makers, intermediaries, charities as well as recipients of gifts of shares.

What effect does it have on share prices?

Studies have shown that stamp duty and SDRT depressed the price of shares and in particular those more frequently traded. Whilst that argument is compelling, over time the market has come to accept the tax and assumes that the price of the share has an inbuilt adjustment for it.

The American scientist and inventor, Benjamin Franklin famously said that, in life, two things are certain - death and taxes. Investors will therefore have to accept that, when buying shares, they will also be paying stamp duty or SDRT for some time to come!