Stamp out stamp duty

A pernicious tax – stamp duty on shares has been seen as an attractive tax as it is easy and cheap to collect and appears to have limited impact on the behaviour of those that pay it. This is wrong – it is a pernicious tax that is having a material impact on UK equity markets.
Competitive disadvantage – the UK purports to have a highly competitive financial environment. This is not correct regarding trading costs – there is a material cost disadvantage vs the US (the key competitor) and even against European markets.
Liquidity matters – liquidity may not seem that relevant at first sight, but it is a vital aspect for the health of an equity market. Not only does stamp duty impact on liquidity, it also impacts on the visibility of liquidity.
Growing the pie – there is clear recognition of the importance of financial markets for the overall prosperity of the UK and rate of economic growth. A strong and successful equity market is core to the overall financial sector and action needs to be taken to reverse the malaise.

Recommendation – it is clear that stamp duty should be removed as part of a series of reforms to help the recovery in UK capital markets. At the very least we believe stamp duty on small & midcap shares should be removed, and materially reduced for larger companies. Whilst this would reduce tax in the very short term, it would materially raise tax due to enhanced economic activity and increases in other taxes.

Why stamp duty matters. Stamp duty is a cost on trading. It may not matter that much to those that trade occasionally, given that it is relatively low (0.5%) and is just a cost of doing business. However, it is relevant to those that are active traders. Given that it is active traders that drive liquidity, this means that the UK market is unattractive for these participants. They are more likely to prioritise markets with low/no cost (eg the US), which encourages ownership of overseas businesses rather than domestic investment. In addition, it encourages use of instruments (eg CFDs) that are exempt from stamp duty.

Furthermore, stamp duty directly impacts on shareholder returns and depresses returns for pensions investing in UK equities, further encouraging a move into overseas equities or other assets.

Why liquidity matters. Investors increasingly focus on liquidity (ie the number of days’ volume to build/sell a position) as part of their screening mechanism. The lower the liquidity, the less likely to take a position. This is particularly key as the funds industry consolidates and becomes more international, and as US investors are highly focused on liquidity. Not only does stamp duty impact on liquidity, it also distorts the visibility of liquidity in the UK due to increased use of swaps, CFDs and other derivative products.

Small & midcap impact. The small & midcap sector is particularly exposed to this trend as many investors no longer invest in this area due to the lack of liquidity. This contributes towards driving lower valuations and is one of the reasons for the exodus of smaller companies from the UK combined with the lack of new IPOs.

Other initiatives required. We believe UK markets need material stimulus to reverse the current malaise. Regulatory reform is helpful but not the answer in our view. What is required are initiatives to drive demand and fund flow. Stamp duty reform is essential, alongside other initiatives such as encouraging retail investors (eg through a British ISA) and reversing the pension fund withdrawal from UK equities.

Trend in stamp duty

Revenue from stamp duty on shares peaked in 2000 at £4.7bn. After a depressed period, there was a brief recovery with elevated trading levels during Covid. However, there was a marked reduction in 2023 as shown below.

Figure 1: Revenue from stamp duty on shares

Source: ONS

The £3.3bn of tax revenue from stamp duty generated in 2023 equated to 0.3% of total UK tax revenue.

Given the flow of trading to the US, driven by the weighting of tech companies, depth of market and lower costs, there is also a trend of larger companies moving listings. The recent ones include Ferguson and CRH, with Flutter and Smurfit Kappa to follow soon. In addition, Just Eat, BHP and TUI have dropped their main listings in London to move to their home markets where liquidity is higher. The following table shows the key companies that have dropped their London listing or moved their primary listing.

Figure 2: Key companies dropping London listing/moving primary listing

	Year	Value £bn	% FTSE All-Share
JustEast takeaway	2021	2.5	0.1%
BHP	2022	123	5.1%
Ferguson	2022	25	1.0%
CRH	2023	39	1.6%
TUI	2024	2.8	0.1%
Flutter	2024	29	1.2%
Smurfit Kappa	2024	7.6	0.3%
Total		229	*9.4%*

Source: Peel Hunt

This shows that close to 10% of the market value of the FTSE All-Share will have exited in only three years.

Individually these may not matter, but cumulatively they do and the more that move, the more likely that others will follow. In addition, there is a continual shrinkage of the overall numbers of companies that are fully listed, with a 20% reduction over the past five years. As a result, the tax revenue from stamp duty is likely to inexorably decline.

Potential action

A full removal of stamp duty should materially improve the prospects of the UK market. Of course this is a significant amount of tax revenue, so a more targeted approach might be more palatable. Below, we set out the potential cut-offs and the value of shares traded in those segments as a proportion of total value traded for all companies.

Remove stamp duty on:

All companies = £3.3bn.
Companies outside the FTSE 100 (equate to c.15% of total value traded).
Companies <£1bn market cap (c.6% of value traded).
Companies outside the FTSE SmallCap (c.2% of value traded).
Investment companies as they are effectively taxed twice.

Although removing/reducing stamp duty would have a direct impact on tax revenue, we believe this would be more than offset by increases in other taxes. A regular flaw in Treasury/OBR decisions on tax revenue is to overly weight the ‘lost revenue’, but to under-weight the harder to calculate gained revenue.

The fact that the tax take on stamp duty has not increased in 20 years demonstrates the negative impact it has had on the market.

In our view, removing stamp duty would:

Increase demand for UK shares. An increase of 10% in the UK market would add £250bn of value, of which £110bn would be added to UK-based holders.
CGT and IHT would increase, reflecting the higher value of shares.
Companies would be encouraged to list in the UK, helping to grow corporation tax and increase economic activity, particularly for the vital financial sector.
Increased fund flow into UK markets would enable companies to access the market for growth investment.
Increase the relative attraction of UK equities for pension funds.

Stamp duty comparisons

The table below shows some international comparisons and what products pay stamp duty in the UK.

Figure 3: Stamp duty comparisons

Ireland	1.0%
UK – shares	0.5%
France	0.3%
Hong Kong	0.3%
Singapore	0.2%
Spain	0.2%
Italy	0.1%
UK – cryptocurrency	0%
UK – ETFs	0%
UK – spread betting	0%
UK – AIM shares	0%
UK – share buyback	0%
US	0%
Germany	0%
France (companies <e1bn mkt cap)	0%
Spain (companies <e1bn mkt cap)	0%
Australia	0%
Spain (companies <e500m mkt cap)	0%

Source: Peel Hunt

This shows that Ireland is the key outlier. Although there are multiple reasons for the decline of the Dublin stock market, the tax on transactions has been an important reason for liquidity moving to other venues. This has decimated the market, with the number of listed companies moving from 65 fifteen years ago to only 30, when Flutter and Smurfit Kappa exit. The decline in size of the overall market creates fundamental problems as asset allocators inevitably de-prioritise the Irish market.

Apart from Ireland, the UK has the highest level of stamp duty, with many leading venues (eg the US, Germany, Australia) having no stamp duty at all. Other countries (eg France and Spain) have exempted small & midcap companies.

Furthermore, many other transactions in the UK are exempt (eg cryptocurrency, ETFs, CFDs and spread betting). All of this means that liquidity drains away from the main market, with the inevitable consequences of lower investor appetite and valuation. Again, this may not appear important in the short term, but becomes endemic over the long term.

AIM comparison

Stamp duty on AIM shares was removed in April 2014 in order to:

Boost investor participation in equity growth markets.
Improve the conditions for growing companies raising equity financing.

HMT estimated that there would be a reduction of £170m in tax take from exempting AIM companies, equating to c.6% of total stamp duty (this amount was certified by the OBR). The actual impact is likely to have been materially lower given the reduction in the AIM market as larger companies have moved to the full list, companies have been acquired, and businesses have exited due to failing models. There were 810 AIM companies in 2014 versus 651 today.

This was expected to boost the economy. However, the benefit was over-ridden by the weak economic performance of the UK, Brexit and Covid, as well as the rise of private equity.

The additional costs for HMRC in implementing the change were expected to be negligible, with the main requirement being some system changes in CREST.

US vs UK comparison

The scale of the US market means that US liquidity dwarfs the UK, which is not surprising given that the market cap of Microsoft is larger than the entire UK market. The value traded in the S&P 500 is c.15x larger than the FTSE 100.

When looking at liquidity it is important to ensure that the data is accurate. One of the consequences of charging stamp duty is that a considerable and growing level of trading in London is done off-market and through swaps. This means that trading volumes are regularly understated, as many observers are not aware of the scale of trading that is not reported through the LSE. This has real consequences, as many funds base their investment decisions on data that is flawed. This reduces investment in shares quoted in the UK and also drives a view that liquidity is far higher for comparable stocks in the US. This is a direct negative impact of stamp duty.

The LSE did some helpful analysis last year to show that it is important to reflect all trading venues when comparing liquidity. Interestingly, this shows that adjusted for market cap, the level of liquidity in the UK is similar to the US. This means that for individual companies, on average, liquidity is no different if listed in the UK or the US. The slides from the LSE report can be accessed here.

However, market cap really does matter. For example, Berkeley Group has a market cap of £5bn and is the 70th largest company in the FTSE All-Share, but it is smaller than all the companies in the S&P 500. This means that overall liquidity is far higher in the US.

Financial Transaction Tax (FTT)

Back in 2011, the EU proposed a FTT set at 0.1%, with the aim of:

Preventing the fragmentation of the Single Market which could result from numerous uncoordinated national approaches to taxing financial transactions.
Ensuring that the financial sector made a fair and substantial contribution to public finances.
Discouraging financial transactions that do not contribute to the efficiency of financial markets or of the real economy.

The history of the FTT can be seen here. The proposal is much broader than the tax in the UK as it would incorporate financial institutions and both buyers and sellers, as well as having extraterritorial properties. Eleven countries are looking at incorporating the FTT and the Commission has estimated that it would raise >€30bn. The danger here is that this may be seen as an easy source of additional revenue, but the inevitable consequence would be a drain in liquidity from European markets. Thankfully, there has been limited agreement between the countries and little sign of progress.

In the US, the Securities Institute and Financial Markets Association (SIFMA) produced a report on the impact of FTT in 2020, which highlighted the harm to capital markets and the impact on individual investors, corporations and economic growth.

Why does all of this matter?

The de-equitisation of the UK market is deep set and continuing. We have seen a 20% reduction in the number of listed companies over the past five years, with the available market cap reducing, combined with lower liquidity. The outflow of money from UK funds has been relentless, which is depressing valuations, accelerating M&A and resulting in a dearth of IPOs.

The following chart shows that UK investors have recently been putting money back into equities.

Figure 4: Net flows into equity funds

Source: Calastone

The following chart shows that UK investors have recently been putting money back into equities.

However, this is heavily weighted to overseas markets. The chart below shows that outflows from UK-focused funds have been substantial and lasted (to date) for 32 consecutive months.

Figure 5: Outflows from UK-focused funds

Source: Calastone

It is no surprise that this is happening given the shift in portfolio allocation by wealth managers and platforms. For example:

Hargreaves Lansdown operates funds for retail investors that are classified Adventurous, Moderately Adventurous, Balanced and Cautious. The UK allocation of these to UK equities are 8.35%, 12.09%, 9.8% and 6.22%, respectively.
The issue is exacerbated when looking at the allocation to companies with a market cap of <£1bn, where the respective numbers for each fund are 1.28%, 1.19%, 0.77% and 0.55%. These numbers are for all geographies, so the allocation to UK companies <£1bn are <0.1% of the portfolio.
The allocation to UK companies has reduced. For example, the UK was 13.79% of the Moderately Adventurous Portfolio in September 2023 but is now 12.09%.

This is not to decry Hargreaves Lansdown’s allocation policy, but to demonstrate how little investment is allocated to the UK, and smaller companies in particular, as a result of portfolio management.

Studies on stamp duty

Although many of these reports are somewhat dated, they do provide a helpful background to considering the benefits to the economy of removing stamp duty.

AIC comment on investment companies

Key points:

There is double taxation as investors pay stamp duty on purchasing shares in the investment company and the investment company also pays stamp duty when it buys UK shares.
The tax position is inconsistent with the treatment of open-ended funds.

2007 Oxera report

Key findings: