Now Let’s Remove Stamp Duty: Revitalising the UK Equity Market

The 0.5% stamp duty on the purchase of UK shares is often viewed as a minor cost with minimal impact. However, this tax has significant, damaging effects on the UK equity market. Its removal could be a game-changer for the competitiveness and vitality of our financial environment.

Contrary to popular belief, stamp duty is more than a minor inconvenience; it’s a substantial burden on the market. While it’s true that collecting this tax is easy and cheap, the broader economic consequences are far from negligible. The duty disproportionately affects active traders who drive liquidity, rendering the UK market less attractive compared to other financial hubs like the US, where such taxes do not exist.

The UK prides itself on a competitive financial market, but the reality of trading costs tells a different story. Compared to the US and even many European markets, UK shares bear a material cost disadvantage due to stamp duty. This discrepancy discourages investment in domestic companies and drives capital towards markets with lower transaction costs.

Liquidity is crucial for a healthy equity market. It ensures efficient price discovery, reduces volatility, and attracts investment. Stamp duty hampers liquidity by discouraging frequent trading, leading to less visible and accessible liquidity. The tax incentivises the use of alternative, tax-exempt instruments like Contracts for Difference (CFDs), further distorting the true picture of market activity.

The small and midcap sectors are particularly vulnerable to the adverse effects of stamp duty. These companies already suffer from lower liquidity, making them less attractive to investors. The duty exacerbates this issue, contributing to lower valuations and deterring IPOs. Eliminating stamp duty for these sectors could revitalise interest and investment, supporting their growth and market presence.

The prosperity of financial markets is integral to the overall economic growth of the UK. A strong equity market boosts the broader financial sector and drives economic activity. Removing stamp duty would stimulate investment, improve market conditions, and ultimately increase tax revenues through enhanced economic activity and higher capital gains.

Interestingly, the revenue from stamp duty on shares peaked in 2000 at £4.7bn and has seen significant fluctuations since. In 2023, it was down to £3.3bn, just 0.3% of total UK tax revenue. This decline reflects the growing trend of capital moving to more attractive markets like the US, highlighting the need for reform.

The Case for Removal and Broader Reforms

Removing stamp duty would increase demand for UK shares, enhancing market value and boosting tax revenues through higher capital gains and corporate activity. It would make the UK market more attractive for both domestic and international investors, encouraging companies to list and grow here. The increased investment flow would benefit pension funds and overall economic health.

Globally, the UK’s stamp duty on shares the highest behind Ireland. Major financial hubs like the US, Germany, and Australia have no such tax, and other countries have exempted small and midcap companies. This discrepancy puts the UK at a competitive disadvantage, driving liquidity and investment away from our markets.

Stamp duty reform should be part of a broader strategy to rejuvenate UK markets. Encouraging retail investment through initiatives like a British ISA, reversing the pension fund withdrawal from UK equities, and broader regulatory reforms are essential steps to drive demand and fund flow back into the market. This multifaceted approach will ensure the UK remains a leading global financial centre, with a vibrant and competitive equity market.