Tax odyssey: the journey to a single securities tax

Overview of proposed reforms

Key features of the proposed STS include:

• A 0.5% charge on the consideration paid for transfers of shares and securities, including debt with certain equity like features (see ‘Loan Capital Exemption and Debt Capital Markets’ below).
• Retention of many existing exemptions and reliefs (including group relief, reconstruction and acquisition relief, and the growth market exemption), subject to anti-avoidance provisions.
• Exclusion from scope for the grant of call options and warrants (which can otherwise be subject to stamp duty), transfers of partnership interests and the grant of security interests, again subject to anti-avoidance provisions.
• A geographical scope based on that currently applicable to SDRT but with possible modifications (see ‘Geographical scope’ below).
• STS will be charged at the earlier of ‘substantial performance’ or completion.
• Transactions effected through CREST will remain largely unchanged; transactions outside CREST will be reported and paid via a new online portal. The portal will issue a Unique Transaction Reference Number (UTRN) immediately upon submission of the tax return, enabling same-day registration of share transfers (see ‘Self-assessment and the online portal’ below).
• Payment will be due within 14 days for electronic settlements, and within 30 days for other transactions.
• The purchaser will be primarily liable to pay the tax, although this may be subject to further refinement (see ‘Self-assessment and the online portal’ below).
• The compliance regime will broadly follow the existing SDRT rules, including information and inspection powers, discovery assessments, and a percentage-based penalty system for late notification and non-payment.
• There will be no statutory pre-clearance system, although the non-statutory HMRC clearance will remain available for cases in which there is genuine uncertainty.
• Existing de minimis provisions (which apply to stamp duty but not SDRT) will be abolished (see ‘De minimis provisions’ below).
• The Government is working towards a commencement date in 2027 for the STS, with draft legislation to be published ‘in due course’. The portal is already in the early stages of development.
• Changes in relation to the 1.5% charge are being considered outside the scope of the consultation and consultation response document (see ‘Consultation on the 1.5% charge’ below). 

Meaning and calculation of consideration

Definition of consideration

The new STS will adopt the definition of consideration currently used for SDRT purposes (‘money or money’s worth’) (FA 1986 s 87(1)). This definition is generally considered more comprehensive and less susceptible to avoidance or distortion of taxpayer behaviour than that applicable to stamp duty (which includes cash, the assumption of debt, or the value of any other stock or marketable securities given in exchange (Stamp Act 1891 ss 55 and 57)). The Government also promises additional clarity on the meaning and interpretation of ‘money or money’s worth’. 

Contingent, uncertain and unascertainable consideration

The treatment of contingent, uncertain and unascertainable consideration for stamp duty and SDRT purposes can produce unsatisfactory outcomes in each case. For stamp duty, the amount is determined based on the ‘wait and see’ and contingency principles. For SDRT, an estimate of consideration is required as at the date the agreement is made.

For the purposes of the new STS, the Government confirms that the approach will largely follow the rules used for stamp duty land tax (SDLT). The general rule will therefore be that the buyer must make a reasonable estimate (rather than obtain a formal valuation) of the final consideration as at the effective date where the consideration is uncertain or is yet to be ascertained. However, the buyer may apply for a deferral in certain cases. For the STS, the Government proposes a four-year backstop (extendable up to 12 years in certain circumstances). This aspect of the proposed reforms has been widely welcomed and is expected to offer a considerable improvement on the current position (in which the contingency principle especially can produce some very unfair outcomes). The Government has promised to clarify the requirements of a ‘reasonable estimate’.

Market value rule

FA 2019 introduced a limited market value rule for both stamp duty and SDRT purposes (including the 1.5% charge). For stamp duty, it introduced a market value charge for transfers of listed securities between connected companies in circumstances where group relief is not available. For SDRT, the transfer of listed securities by a person to a connected company is deemed to take place at market value. FA 2020 further extended the market value rule to unlisted securities in circumstances in which there is a transfer of such securities to a connected company and the consideration is by way of issue of shares. The Government intends to retain the market value rule for the new STS and to clarify its operation in the context of the 1.5% charge.

Geographical scope

The geographical scope of the new tax is of significant practical importance as this has been a particularly troublesome aspect of both the stamp duty and SDRT regimes, in particular for transfers of securities issued by non-UK issuers. Stamp duty is effectively chargeable on instruments executed in the UK or otherwise relating ‘to any matter or things done or to be done in’ the UK (Stamp Act 1891 s14(4)), even where the issuer of the shares or securities in question is incorporated outside the UK. This, coupled with the lack of clear rules on the incidence of the tax, has produced considerable uncertainty, and transfers are regularly executed outside the UK to avoid unintended charges or the risk of such charges in untested circumstances.

Instead, the Government proposes that the geographical scope of the STS should be based on that currently applicable to SDRT. Transactions are in scope to the extent that they relate to ‘chargeable securities’. These are defined as stocks, shares or loan capital, but exclude stocks, shares or loan capital unless issued by a non-UK incorporated company and kept on a UK register (FA 1930 s 99).

However, the meaning of ‘UK register’ can be unclear in many circumstances, in particular where documents are executed remotely or digital securities are in play. A number of the respondents to the 2023 consultation raised this point, and the Government has agreed in its consultation response document to consider further whether to jettison the link to the UK register and instead for the scope of the STS to depend solely on whether they are issued by a UK-incorporated issuer. Alternatively, the Government may seek to provide additional guidance on the meaning of ‘UK register’.

There is also a need to clarify the SDRT nexus where an issuer is a foreign entity but not a body corporate (currently bonds issued by such an entity are within the scope of UK SDRT). If the reforms are to succeed, they must align with the realities of global securities trading and provide certainty for both domestic and international investors.

Loan capital exemption and debt capital markets

There is an exemption from both stamp duty and SDRT for loan capital other than loan capital with certain equity-like features. There is also a separate exemption for nonmarketable debentures. Both are important in practice; however, there is considerable overlap between the two and their parameters are often difficult to define.

In its consultation response document, the Government confirms its intention to retain the loan capital exemption in substance. However, it is proposed that this will instead be achieved by defining the scope of the STS by reference to securities in UK companies, including stock and bonds with equity-like features (to be defined similarly to the loan capital exemption). As a result, the Government considers that the debenture exemption does not need to be incorporated specifically into the new regime.

Self-assessment and the online portal

For transactions not executed through CREST, the move to self-assessment via the new Government portal will represent a significant change.

The portal will generate a UTRN immediately upon submission of the tax return which will be used to enable immediate registration of share transfers with the relevant registrar. Payment of the STS amount will take place separately and any late payment or failure to make payment will be dealt with by usual HMRC debt management procedures. Non-payment or late payment will not affect the transfer of ownership in the shares or securities.

As with SDRT, the purchaser will be primarily liable to pay the tax, being the liable and accountable person. However, the consultation response document also contemplates a further refinement, suggesting that where an agent is used in the context of non-CREST transactions, it would be useful for the agent also to be an accountable person. Further detail on how this ‘accountability’ is proposed to work for agents and advisers would be welcome.

De minimis provisions

The proposed abolition of the GBP1,000 stamp duty de minimis provision will be frustrating for some. The rationale appears to be that the shift to digital reporting removes the administrative rationale for the exemption. However, its practical consequence will be to bring numerous, small, off-market transactions within the scope of stamp duty. Some taxpayers may need the help of advisers to complete portal returns on their behalf. It is questionable whether this constitutes an effective or fair use of taxpayer resources, given the negligible revenue likely to be generated from these transactions.

Consultation on the 1.5% charge

The 2023 consultation made it clear that its scope did not include the 1.5% charge, which would be addressed separately. It is also important to note that, in the intervening period, there have been significant changes to the scope of the charge as a result of EU law no longer forming part of the UK’s domestic legislative regime. In summary, a 1.5% charge to stamp duty and SDRT can arise on transfers of relevant securities of a UK-incorporated company to a depositary receipt scheme or clearance service.

Key proposals in the consultation on the 1.5% charge include:

• Additional clarity on the meaning of depositary receipts to confirm that these encompass both physical and digital receipts.
• Additional clarity on the application of the market value rules for connected persons and non-sale transfers (which will be retained for the new STS) to the 1.5% charge.
• Possible abolition of the charge on bearer instruments and removal of references to paired shares, reflecting current market practice.
• In relation to liable and accountable persons, an alignment with the SDRT regime is proposed so that the transferee will be the liable person, with the depositary receipt issuer or clearance service as the accountable person. (Currently the depositary receipt issuer or clearance service is both the liable and accountable person.)

The consultation runs until July 2025 with a consultation response document expected thereafter. It is conceivable that any reforms arising from the consultation on the 1.5% charge will be incorporated into provisions introducing the new STS. However, the Government appears to suggest that the two regimes may exist independently.

Are we nearly there yet?

After more than eight years of discussion, it is still too early to draw any final conclusions about the new STS. The absence of draft legislation—promised ‘in due course’—and the ongoing consultation on the 1.5% charge, which will not close until July 2025, mean that the path ahead is still uncertain. Only once the consultation response is published and the legislative details and any guidance are finalised will it be possible to assess more conclusively.

While it is possible to identify areas where the proposals could be improved, it is also important to recognise the scale of the task at hand. Overhauling this area of tax is a significant undertaking, but it is one that is worth getting right, as this is not a pilgrimage to be repeated regularly.