With the Budget looming later this month, chancellor Rachel Reeves is reportedly weighing a bold move to shake up the country’s investing culture: scrapping stamp duty on shares.
Currently, investors with stocks and shares ISAs pay a 0.5% levy when they buy UK-listed shares – a cost that is hidden within transaction fees and eats into their returns. This means they are effectively penalised for backing UK-listed companies, even as they are shielded from income and capital gains tax.
However, the issue of sacrificing the revenue that comes from this stamp duty will be a major factor influencing the chancellor’s decision, as she scrambles to fill the Treasury coffers.
Axing stamp duty on shares entirely would cost the government millions, but AJ Bell has predicted that just removing the tax from UK shares held in an ISA would amount to a more digestible £120m.
Richard Stone, chief executive of the Association of Investment Companies (AIC), said the removal of stamp duty on shares purchased within ISAs and pensions “would encourage private investors and pension funds to hold more UK shares and remove the self-defeating bias that the UK tax system currently creates in favour of overseas equities”.
Indeed, an interactive investor poll of 1,000 retail investors earlier this year found that 72% said removing stamp duty on UK shares and trusts would incentivise them to invest more in UK assets – whereas just 7% said they would invest more into the stock market if the government follows through on plans to slash the annual cash ISA allowance.
Stone also made the case for the chancellor to remove the tax from investment company shares.
“Competing products such as open-ended funds are not taxed, which distorts the market,” he said. “The current approach is also an example of double taxation, since investors pay stamp duty when they buy investment company shares and then the investment company pays it again when it invests in UK companies.”
In addition, it has been reportedly suggested that the Treasury may give a stamp duty holiday to new London stock exchange listings to reinvigorate a flagging stock market.
Laith Khalaf, head of investment analysis at AJ Bell, said: “Granting an exemption on newly listed companies would reduce a significant barrier to investing in the UK and potentially attract a broader pool of investors.
“It would also encourage more companies to list, knowing there is less of a tax deterrent in their first few years on the market.”
The Financial Conduct Authority has previously relaxed listing rules by introducing measures empowering company management over shareholders and introducing a sunset clause allowing companies to go public with dual class shares – meaning they can sell shares that carry different voting duty weights.
Adding a three-year stamp duty holiday alongside such measures “might be considered another step on the journey towards greater retail participation in the UK stock market”, Khalaf said.
However, Mark Campbell, head of wealth proposition at Isio, pointed to the counterargument, which is that stamp duty raises around £4bn annually.
“Removing it would favour the wealthy and provide little incentive to increase trading volume,” he said.
As such, Campbell said it is hard to see how its removal would materially influence behaviour - and there is also the question as to how Reeves would replace that lost revenue stream.