Stamp duty is the UK transaction tax charged on purchases of equities, also known as stocks & shares. The current rate of stamp duty, known officially as Stamp Duty Reserve Tax when levied on electronic transactions, is 0.5%.
The charge is calculated based on the underlying value of shares purchased. Therefore, if you buy shares through a UK stockbroker, you will pay £201 to acquire £200 of shares. Your broker handles this all automatically, and you won’t have to make any separate disclosure or payment to HMRC to settle your bill.
It’s clear that stamp duty is an investing cost worth reducing if possible. In this article, we’ll look at how you can pay less stamp duty when investing.
How to avoid paying stamp duty
Taking advantage of official exemptions from stamp duty
Here is a list of scenarios in which you don’t have to pay stamp duty on receipt of shares:
- Shares received as a gift from friends, family or anyone
- Shares received through inheritance
- Shares are transferred between spouses, civil partners or ex-partners following a divorce
What all of these scenarios have in common is that these acquisitions of shares are not at arm’s length and are not straightforward purchases in exchange for cash.
Using derivatives
Derivatives are contracts between two parties (usually between a trader or corporate and an investment bank) which will result in a cash flow between the entities depending on the price performance of another asset or instrument on a given date.
Examples that you may have heard of include options, forwards and swaps.
Derivatives available to some retail traders take the form of ‘Contracts for Difference’ or ‘Spread bets’, which see a trader bet against their broker as to whether security will move up or down in price.
Derivatives are ‘side-bets’ rather than actual investments in shares. If you use a CFD broker to take a long position in the shares of a company, you will not be charged stamp duty.
However, as our article on spread betting explains, these types of contracts usually contain high leverage compared to the amount of capital an investor deposits into their account. This means that these can provide highly volatile gains and losses relative to the size of your portfolio. CFDs and spread betting is regarded as higher risk than straightforward equity investing.
Based on industry disclosures, it is typical for between 60% and 90% of retail traders to lose money when trading CFDs. That high loss rate is attributable to the high volatility meaning that some traders can be wiped out by significant adverse market movements.
Engaging with the risk of leveraged investments with the goal of avoiding a 0.5% stamp duty charge could be foolhardy if you cannot control the risk.
Buying alternative asset classes
Purchases of shares may attract stamp duty but other investments do not, such as corporate bonds and cash deposits. Alternative investments are known as asset classes, and they bring their own combination of risk and reward.
While a corporate bond investment wouldn’t attract stamp duty, it would be a fundamentally different investment to hold. It wouldn’t be wise to upend your entire investment strategy in the pursuit of a 0.5% one-off cost saving. Yes, you would be paying less stamp duty, but you may also be forced to take significantly more or significantly less risk than you would be comfortable with.
It’s also likely that you may be unable to use a Stocks & Shares ISA to invest in other asset classes, as the types of investments that can be held within a Stocks & Shares ISA are restricted.
Investing in funds is not a valid way to avoid paying stamp-duty
Many armchair investors assume that investing via collective investment schemes such as funds is an effective way to avoid stamp duty. When you buy units of the best funds, you’ll see no stamp duty line on your brokerage receipt. However, stamp duty is still paid by the fund itself when buying shares directly, and these costs are passed onto you as the beneficiary of the fund.