How Much Does Stamp Duty On Shares Cost?

By Louis H-P on June 29, 2020

Stamp duty on shares is a large subject area, so we will focus on shares traded electronically. In this article we will highlight the cost of stamp duty on your stock portfolio, but also ways of avoiding it to your benefit. This means focusing on SDRT. Do not forget, any form of cost will impact your overall return. 

What is SDRT?

SDRT stands for Stamp Duty Reserve Tax and is the stamp duty on shares which are traded electronically. As most investors hold their investments electronically this will be the most relevant stamp duty tax for retail investors.

The SDRT cost is 0.5% of the transaction, and will appear on the contract note alongside the broker fee for placing your trade. For example, if you pay £1,000 for BP shares, you would pay 0.5% of £1,000 which comes to £5.

How is stamp duty on shares applied?

SDRT is applied on UK share purchases and is not payable on shares listed abroad. For example if you bought shares in BP, you would have to pay 0.5% of the transaction. On the other hand, if you bought a US or EU listed share, there would be no SDRT to pay. This gives possibilities to avoid paying this extra fee/tax with a foreign portfolio investment and so increasing your stock portfolio‘s return.

Save on fees and tax with an ETF!

Although not quite capital preservation, ETF’s are very efficient at insuring that the greater majority of the capital you commit creates a return. This is achieved by keeping the cost low through tracking a market and removing the human element. Yet ETF’s are not subject to SDRT, which is an extra bonus saving. This is because the majority of ETFs are domiciled in Ireland, which is considered offshore from a stamp duty on share’s perspective. Always check the detail on the factsheet though, as some may be domiciled in the UK and will therefore be subject to SDRT. Passive investment often outperforms human managed money.

A little more complicated…

Investment trust are a uniquely British enterprise. They are companies which are created to invest other’s money and are listed on the UK stock market. They have boards of directors and teams of portfolio managers. One of the more famous ones is Scottish Mortgage due to its outstanding performance over recent years.

As the majority of investment trust are registered in the UK, therefore onshore, they pay stamp duty on shares. Yet some are registered offshore in places such as the Channel Islands and therefore there is no SDRT to pay.

It pays to do you homework.

Although some offshore locations do not have as strong a regulatory oversight as the UK, the Channel Island do, so from an investor perspective, offshore companies registered there are attractive. You should still do your homework and check exactly where the offshore company is registered and what regulatory oversight there is.

Efficient investing

Learning to invest is not only about buying something low and selling it high. Checking the administrative details around your investment is often overlooked. Individual shares, ETFs and Investment Trusts all have advantages and disadvantages from an investment perspective. These should be used to fit and complement what you are trying to achieve.

Having a mixture of the three will ensure a balance between their respective advantages and reducing how much stamp duty on shares you pay. There are other aspects to focus on such as price discovery and fees. Over time, reducing the cost of your portfolio will increase the compound growth, which is the big attraction of investing in shares.

Conclusion

Tax does not need to be taxing, was a famous advert of years gone by. Sadly despite attempts by HMRC to say the contrary, tax is complicated due to constant tinkering. It is always worth getting your information from the horse’s mouth and visiting HMRC’s website for more details. At the core of it, diversifying your investments will mean less downside risk, increased possibility of capturing a megatrend and also a chance to reduce tax you pay!

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Louis H-P

Louis is a portfolio manager and a trader who brings a wealth of experience in private banking to The Lazy Trader. A fundamentalist and a trouble-shooter, Louis makes a firm contribution to the trading team.

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