There are many questions that surround the world of trading stocks and shares, such as what is CFD trading? How does equity trading work? Or, what’s the truth behind stamp duty? Now, the latter we may just be able to answer!

Stamp duty is a tax that gets applied to your bill when you buy a residential property or piece of land, within England or Northern Ireland. And, when you make such a purchase, this added sum goes straight into the government’s pocket. If you’re buying property, then the stamp duty is a land tax of which the amount you have to pay will be dictated by the priced of that house.

What’s less known about stamp duty, is that it is also applied to investments in the stock market.

In this case, it’s known as Stamp Duty Reserve Tax (SDRT). This 0.5% tax charge is applied when shares are bought electronically. If you find yourself still making non-electronic deals, then the charge is only applied to transactions that exceed £1,000. Back to electronic trading, 0.5% might not seem much, but this will quickly add up if you’re a frequent trader.

When will you have to pay Stamp Duty Reserve Tax?

Although we have already given you an idea of when you should expect these charges to appear, there are a few other instances to be covered. SDRT will be applied when you buy:

  • Existing shares in a company incorporated in the UK
  • An option to buy shares
  • An interest in shares – a percentage of the money that comes from selling them
  • Shares in a foreign company that still bears a share register in the UK
  • Rights arising from shares – rights you have retained for when new shares have been issued

The rise and fall of SDRT profits.

From 2002 to the start of 2008, the amount that the government earns from SDRT continuously increased. However, with the sharp aftereffects of the global financial crisis in 2007 soon taking their toll, this figure quickly plummeted by 20%.  The decline continued, much to the distaste of the government’s purse strings, spanning across a further six-year stint, before any improvement was seen to be made. From late 2008 onwards, SDRT profits have begun to maintain stable growth once again, netting the government an impressive £3.5million in the 2017/18 tax year.

Good news! There is a way to avoid Stamp Duty Reserve Tax.

To ensure that you’re not affected by SDRT, the best practice is to make an investment into one of the relatively small companies that are listed on London’s Alternative Investment Market (AIM). Now, with that said, you shouldn’t invest in something from AIM just because you want to avoid that added tax sum – be smart about it! However, a lot can be said for a wise investment in a smaller firm.

In the first month and a half of 2019, London’s Alternative Investment Market saw a rise of 5.24%, an increase that almost rivals that of the Financial Times Stock Exchange (FTSE) 100 index, which saw an increase of 5.86% itself.

Stamp Duty Reserve Tax doesn’t apply everywhere.

It may interest you to know that the UK is actually the only country that penalises its investors when they buy into British companies. If you were to buy into a market outside of the UK, you’d be subject to no charges, the same as if you were to invest in bonds that have been issued by corporations or the government.