Staging its annual
ritual Stamp Dance in early 2006, the London Stock
Exchange urged then Chancellor Gordon Brown to
abolish stamp duty on share deals, arguing that
it is destroying the competitiveness of London
as one of the world's top three financial centres.
During the market
downturn in 2001 and 2002, the LSE argued that
the abolition of stamp duty was just the tonic
that the market needed. Brian Mairs of the Association
of Private Client Investment Managers and Stockbrokers
told the BBC that even the abolition of the tax
on small cap companies such as those quoted on
the AIM or OFEX would act as "a huge psychological
The 0.5% rate at
which stamp duty is paid in the UK is far higher
than that of Germany and the US, and therefore
threatens the LSE's position as one of the world's
top three stock exchanges.
However, Mr Brown
was never likely to make such a generous gesture
given the worsening fiscal situation he was facing
at the time (and is currently facing as Prime
Despite the fact
that the issue was conspicuous by its absence
in the chancellor's pre-budget report in 2005,
investors, city opinion formers, and big business
concerns were nonetheless hopeful one more time
that Gordon Brown would announce changes to the
antiquated concept of stamp duty in that year's
budget, but they were, as usual, disappointed.
The UK is the last
major world economy to impose this level of taxation
on share purchases, and the 0.5% tax (which on
a GBP5,000 transaction would cost the investor
GBP25) is the highest in Europe.
Stamp duty used
to be something of a 'hidden' cost, with a 0.5%
surcharge on the purchase side of a share transaction
hardly noticed amid all the other commissions
and fees involved. However, technological advances,
such as the possibility for online trading, and
the fierce competition among brokers, have combined
to drive down trading costs, making stamp duty
an ever more significant and obvious factor in
the overall cost of a transaction.
Stamp duty is one
of the easiest taxes to administer, which goes
a long way to explaining why the Treasury has
wanted to continue levying this 17th Century tax
into the new millennium. All UK share transactions
are settled through the London Stock Exchange's
electronic settlement system, CREST, and it is
CREST that collects the tax as a surcharge on
every purchase, and transfers it to the coffers
of the Exchequer.
of the LSE, Don Cruikshank, predicted in 2003
that if changes weren't made to stamp duty legislation,
total losses of trading could be as much as GBP1tn.
was quickly proved right, when in May 2004 Inland
Revenue figures showed that revenues from the
tax on share trading fell from GBP4.5bn in the
2000/2001 tax year to GBP2.6bn in 2003/2004.
UK government had thus -- in that period alone
-- foregone GBP2.5 billion in revenues from stamp
duty on shares as fund managers and investors
turned towards derivatives to escape the tax.
published in January, 2005, confirmed the picture,
showing that revenues from the United Kingdom's
stamp duty tax on share trades were likely to
remain flat in 2005 at GBP2.6bn, despite a sharp
increase in the volume of shares traded on the
London Stock Exchange.
seemed that the major reason for this was that
investors were increasingly shunning traditional
share purchases in favour of derivatives such
as contracts for difference (CFDs), which do not
attract the tax.
allow investors to profit on the movement of a
share price without actually owning the physical
stock. Similar to other derivative instruments
such as futures contracts, two parties enter into
an agreement to settle at the close of their contract
the difference between the opening and closing
price of a company's share price.
that offer CFDs are able to hedge their exposure
to the contracts by physically buying the underlying
stock, and by doing so enjoy a tax concession
that means they do not have to pay stamp duty.
In its pre-budget
submission to the Chancellor in October, 2005,
the LSE pointed out the damage being done to the
Exchange's ETF sector by the tax:
is evident that Stamp Duty legislation is preventing
the growth of the ETF market in the UK. The catch
all nature of the legislation means that Stamp
Duty is payable, at 50 basis points, on ETFs that
include normally exempt foreign securities. Since
the average total cost for trading equity ETFs
in Europe is 44 basis points, stamp duty more
than doubles the cost of dealing in overseas ETFs
in the UK. We believe that an ETF incorporated
anywhere (UK, Dublin or overseas) should not be
stamped in secondary market trading if its basket
contains no stampable securities.
is difficult to believe that the Government intended
to extend the duty to normally exempt stocks in
such a manner, nevertheless the consequences are
that it further damages the ETF market in the
UK. There is no revenue gain from the inclusion
of overseas ETFs in the stamp duty regime since
it is sufficient to prevent the market from starting.
If the Government does not remove stamp duty on
UK shares, it should, at the very least, exempt
ETFs containing overseas securities.'
trading continues to develop, especially through
on-line exchanges which can be based in low-tax
jurisdictions of their choice, UK and international
companies will have access to the same international
pool of investors wherever they are registered
and listed. Eventually, this will drive business
to the lowest-cost and most liquid exchange -
that won't include a stamp duty jurisdiction.
by independent consultants, such as Charles River
Associates, suggested that if a chancellor chose
to abolish the tax, such a move would be revenue
neutral, or even beneficial for the economy, because
it would bring other tax gains to the Exchequer,
a fact that Mr Brown seemingly chose to ignore
during his time in the role. The Charles River
findings suggested that the knock-on effects of
stamp duty abolition would be that:
- Enhanced share
values would provide an initial increase in
Capital Gains Tax revenues of approximately
- The volume of
UK companies' shares traded on the London Stock
Exchange would increase by around 40%;
- Income and Corporation
tax revenues would increase significantly;
- The FTSE All-share
index would increase by up to 5%;
- There would
be overall net efficiency gains to the economy
of around £3 billion.
Even a partial
abolition, for example as suggested a recent campaign
for transactions under £5,000, would only
have cost the Exchequer £157 million in
lost revenue per year, and abolishing the levy
would have sent a powerful message about the government's
commitment to dismantling an antiquated and irrelevant
The UK Treasury
is of course more likely to tax the upcoming alternatives
to share trading than to abolish the tax.
April, 2006, is became clear that the Irish Inland
Revenue, which collects 1% stamp duty on stock
exchange transactions, was planning to extend
the tax to Contracts For Differences (CFDs), which
currently don't come in for stamping because they
don't involve buying the underlying shares.
Stock Exchange officials met the Revenue to try
to persuade them that Ireland's CFD business,
which is said to underly EUR3bn a month in trading
on the Irish exchange, would simply decamp to
London if the tax is imposed.
CFD trades are effectively bets on the future
movement of shares, up or down, and can be highly
leveraged. Traders can make their deals either
with the equivalent of a brokerage (call it a
bookie?) or direct with other punters. Either
way, because they do not actually buy the shares
whose price is the object of the trade, it has
been assumed by all concerned in the UK and Ireland
that stamp duty cannot apply.
December 2006, it emerged that the UK government
would be abolishing stamp duty on non-resident
exchange traded funds (ETFs) in an effort to boost
London's competitiveness as an international financial
May 2007, London Stock Exchange Executives suggested
that it was only a matter of time before the UK
government bowed to pressure from the financial
services industry and scrapped stamp duty on stocks
Furse, chief executive, told a news conference,
convened to announce the exchange's full-year
results, that: "the question is not if but
when" the 0.5% tax on the trading of shares
of companies listed in the UK will end.
claimed that there has been a "significant
shift" in the government's thinking since
the publication of a report by Oxera, an independent
economics consultancy, that concluded stamp duty
repeal would bring about multiple benefits for
the UK economy without denting the Treasury's
long-term tax take.
study, commissioned by the LSE, the Association
of British Insurers (ABI), the City of London
Corporation, and the Investment Management Association
(IMA) suggested that ordinary savers and pensioners
are bearing the brunt of the tax, which is reducing
their ability to save and invest for the future.
report revealed that stamp duty reduces a typical
occupational pension scheme fund at retirement
by between 1.52% and 2.38%, or between GBP6,441
and GBP11,538 in today's money. Government schemes
such as Stakeholder Pensions are also said to
be impacted significantly, by GBP7,540 to GBP10,389.
stamp duty yields GBP3 billion annually for the
UK Treasury, the research calculated that if the
tax were to be abolished, these receipts would
be replaced over the longer term through a sustained
rise in the UK's GDP of between 0.24% and 0.78%.
as of December 2008, there had been no further
movement in this area.
look into the (distant) past of Stamp Duty
Stamp duty was
introduced in Holland in 1624, when the need for
a new form of tax resulted in the idea of requiring
stamped paper for legal documents. It was first
levied in England in 1694, and although stamping
was initially confined to documents processed
by the legal profession, in the eighteenth century,
the rationale behind imposing stamp duties changed,
and they became a means of controlling undesirable
activities such as gambling and newspaper reading.
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