Rachel Reeves is looking for taxes to raise, rather than ones to abolish. Never mind: here is a tax that ought to be scrapped by a government that calls itself pro-growth, pro-business and pro-investment, which was the pitch at this week’s big summit. What’s more, the enticing claim from abolitionists is that getting rid of the tax could – with a few qualifications – pay for itself over time because other Treasury receipts would rise.
The tax is stamp duty on shares – or, in full, stamp duty reserve tax, or SDRT. It is the 0.5% levy on purchases of shares in UK companies that brought £3.8bn into the Treasury in the 2022-23 tax year. Ireland has a higher rate, 1%, but nobody else does. The US, China and Germany don’t impose any equivalent tax at all. So the claim that the UK is at a competitive disadvantage in attracting listings and liquidity to its stock market looks solid. At a moment of panic over the sleepy state of London, especially at the bottom half of the stock market, that point ought to resonate.
Dan Neidle, of Tax Policy Associates, making the case for abolition this week, pointed to other effects and distortions. While the tax is ultimately borne by end-investors – private individuals, pension funds, unit trusts and so on – there is also a cost to companies when they raise equity. Because the requirement for buyers to pay stamp duty is a depressing force on share prices, the cost of equity for companies is marginally higher than it would otherwise be.
Similarly, there is an incentive for companies to use debt, which doesn’t carry stamp duty, as opposed to equity. “This all creates a bias in favour of overseas companies versus UK companies, private companies versus public, and debt versus equity. None of these are desirable,” argues Neidle. Absolutely right.
The claim that abolishing stamp duty could pay for itself is looser. It is based on a calculation by the independent consultancy Oxera for the free-market Centre for Policy Studies thinktank that there would be a permanent increase in GDP of between 0.2% and 0.7%, yielding a higher tax take of £2.1bn to £6.8bn. At the midpoint of that range, the lost £3.8bn to the Treasury would be offset.
Would a boost for the wider economy really happen? The argument is that by lowering the cost of equity, and thus companies’ overall funding costs, business investment should rise eventually. Marginal projects would become more attractive, and there ought to be a compounding effect. In terms of direction, the argument feels sound – but, as the range in the projections suggests, precision is tricky.
Thus Neidle’s suggestion sounds best: abolish the tax by phasing it out – a 0.1 percentage point cut per year for five years. To calm Treasury nerves, there could be a review after two. That would have the useful side-effect, as he says, of avoiding an instant windfall gain (from higher share prices) for current owners.
An alternative approach is being promoted by the fund manager Abrdn and others: scrap stamp duty on all shares outside the FTSE 100 index. Shares on the Aim market are already exempt, but an extension up to and including FTSE 250 stocks would directly benefit the area of the market where the crisis of liquidity is most acute. That idea also has merit: the FTSE 250 could test the waters for full abolition.
Whatever the model, something deserves to happen. Indeed, it is bizarre, at a moment when we’re awash with reports on how to reform the UK’s capital markets, that abolishing stamp duty hasn’t been at the centre of the debate. You have to dig as far as page 18 of the last report from the Capital Markets Industry Taskforce to read the excellent argument that it is nonsensical for the Treasury to tax UK retail investors when they buy shares in the UK-listed sports car maker Aston Martin but not when they invest in the German-listed Porsche or US-listed Tesla.
Perhaps the hesitation flows from the thought that it’s hard to imagine the Treasury, especially under a Labour administration, surrendering £3.8bn upfront via a policy that smells like a giveaway to the share-buying classes and big City firms.
On that score, there are two responses. First, the City, in the sense of fat investment banks, would not directly benefit because market-makers don’t pay anyway. SDRT is primarily a tax on ordinary pension savers, other end-investors and companies raising capital. Second, another of Neidle’s arguments, it might be easier for a Labour chancellor rather than a Tory one to navigate the messy politics around an otherwise logical reform.
If Reeves is looking for a rabbit to produce from her hat on budget day, abolishing SDRT fits the bill, especially if she’s simultaneously raising capital gains tax. As a serious signal of being open for investment, it would beat a feelgood summit.
