Shares listed on the AIM market have been exempt from Stamp Duty since 2014, so some managers have questioned why investors are still charged the tax when buying other UK shares, particularly small caps. The 0.5% tax was lifted from purchases of AIM shares in an attempt to encourage buying, but it is illogical to not apply that same thinking to other UK stocks, according to Henry Lowson, manager of Royal London’s UK Smaller Companies and UK Mid-Cap Growth funds.
“People don’t pay Stamp Duty when buying AIM shares, but you do pay Stamp Duty on small-cap shares despite the fact that those companies are often the same size,” he says. “Stamp Duty on small and mid-cap trading isn’t a massive revenue generator for the government, so they wouldn’t be sacrificing a lot of income, but it would materially improve liquidity in the UK market.”
See also: Small caps: The great divide
The government pocketed £3.3bn from Stamp Duty charges in 2023, which was just 0.3% of the total tax revenue it accumulated last year. Forfeiting this income would have little effect on the government’s coffers but could go a long way in reinvigorating sentiment towards the UK stockmarket.
A shrinking market
International and domestic investors alike have migrated away from UK equities in recent years and the market has shrunk as a result. Stamp Duty could be playing a role in deterring investment. A recent survey by Interactive Investor found that more than half (53%) of its users took Stamp Duty into account when buying UK shares, with 37% deciding not to invest because of the tax. Most of the platform’s users (82%) agreed that removing Stamp Duty would incentivise them to invest in UK shares.
See also: The UK is a playground for value managers
However, other data has suggested the contrary. Almost a decade on from the removal of Stamp Duty on AIM shares purchases, a research paper commissioned by HMRC last year concluded the tax “had only a minor impact on guiding or influencing trading and investment decision-making”. It instead found that investors were more driven by the performance and cost-effectiveness of shares rather than the relatively small 0.5% tax they were charged.
Read the rest of this article in the May issue of Portfolio Adviser magazine
