Chancellor Rachel Reeves is being urged to remove stamp duty from UK-listed shares held in an ISA to help direct more money into the London stock market.
She is reportedly looking at reforming the current ISA regime in an effort to build a culture of retail investing in the UK, similar to that in the US.
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How much stamp duty do you currently pay on shares?
In both the cash and stocks and shares ISAs, you are shielded from paying income tax or capital gains tax from the money you earn from your savings or investments.
For cash savers this means you do not have to pay tax on savings interest, and for investors it means you do not have to pay tax on investment gains.
However, ISA investors must still pay stamp duty when buying shares. Currently, you must pay 0.5% in stamp duty when you buy a share, and it usually comes as part of the overall cost of the trade.
If the chancellor got rid of stamp duty on UK shares held in ISAs, it would reduce the overall cost of gaining exposure to the UK stock market and would theoretically make retail investors more likely to invest in the UK rather than the US or other global markets.
The cost of axing stamp duty on UK shares could be minimal compared to the benefit
Rumours that Reeves is considering removing stamp duty on UK shares were welcomed by many investment companies who believe the measure is a far better way to incentivise investment in Britain than implementing a minimum UK shareholding requirement.
Instead of a top-down mandate for ISA investors to put their money into UK shares, supporters believe removing stamp duty on British stocks provides a natural incentive for investors to choose them. It is the carrot rather than the stick.
Tom Selby, director of public policy at AJ Bell, told MoneyWeek that stamp duty “explicitly disincentivises investment in British companies at a time when government policy is aimed at doing precisely the opposite”.
Nine in ten investors said they would increase their holdings in UK equities if the stamp duty on shares was scrapped, a recent survey by investment platform Tradu found, indicating there is appetite among investors.
The issue of cost will be a major factor influencing the chancellor’s decision, especially considering the upcoming Budget is likely to increase taxes.
While the cost of axing stamp duty entirely would be in the billions, just removing the tax from UK shares held in an ISA would be minimal, perhaps as little as £120 million, according to AJ Bell.
“In government spending terms, that is pretty much a rounding error and would remove a nonsensical barrier to ISA investors buying shares in UK businesses,” added Selby.
The reform also comes at a time when London’s stock market is struggling to keep pace with other major exchanges, especially in America. Getting more people to invest in London-listed stocks could mean the UK stock market would increase its competitiveness.
Brendan Callan, CEO of Tradu, said: “If we’re serious about boosting investment in UK stocks, we need to abolish the share tax altogether. Doing so could see nine in ten retail investors increase their holdings in UK equities.
“If the government truly wants to prevent the UK economy from stagnating, it must take bold, decisive action to tackle both the behavioural and financial barriers to investing, not tinker around the edges.”
Not scrapping stamp duty on UK shares could also have larger economic impacts too, investment bank Peel Hunt has warned.
Charles Hall, head of research at Peel Hunt, said in a research note seen by MoneyWeek that stamp duty is harming the UK’s competitiveness in comparison to the US.
It came after reports indicated pharmaceutical firm AstraZeneca is considering a move to the New York Stock Exchange (NYSE).
If the firm moves to the NYSE, Peel Hunt believes its investors could save around £200 million a year in stamp duty payments. If this goes ahead and other large firms follow, the UK could lose £4.5 billion in tax revenue, according to the analysis.
Hall said: “There is a global battle for capital, talent and companies. We believe losing our companies to the US due to stamp duty would be a massive own goal.”
He called on the government to respond, saying: “The obvious answer in our view is to scrap stamp duty, as it would trigger a material improvement in UK equity valuations, drive higher CGT receipts, enhance activity in UK capital markets, and increase spending power.”
On the other hand, if the current regime stays in place, Hall warns that an increasing number of firms could start to leave the London stock market.
