From a taxation point of view, share transactions can be an expensive business; both the buyer and the seller will be required to pay a duty. When you are buying shares you will have to pay one of two types of tax, depending on the way in which the transaction was conducted.
If you regularly buy and sell shares, you may need to report gains and losses to HMRC using our free Self Assessment Helper.
Stamp Duty Reserve Tax
Today, stock transfers most frequently take place electronically. If you are buying shares through a stockbroker, it is almost certain that this transaction will use the CREST system. CREST, or Certificateless Register of Electronic Stock and Shares Transfer, has become the industry standard for electronic transfer, and results in a paperless transaction in which no certificate is issued. In these instances, the tax payable is known as Stamp Duty Reserve Tax.
Stamp Duty Reserve Tax, or SDRT is paid at a flat rate. This is currently set at 0.5%. It is important to note, however, that the amount of tax that you will pay is based on the price that you pay for the shares, rather than what they are actually worth. So, if you are given the shares and pay nothing in exchange for them, you will not be required to pay any tax. If you paid cash for them, however, you will be required to pay 0.5% rounded to the nearest penny. This means that any transaction in which you pay less than £1,000 for shares will still incur a £5 SDRT charge. Finally, shares are occasionally exchanged for goods or services; in these cases, your SDRT liability will be calculated as 5% of the equivalent cash value of whatever it is that was exchange for the shares.
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Some individuals still carry out share transactions that involve a paper certificate or stock transfer form. These are known as ‘paper transactions’ and, in these instances, Stamp Duty rather than Stamp Duty Reserve Tax will apply. Stamp Duty can present a slightly more expensive option than SDRT as a result of the way in which the total liability is rounded. Stamp Duty is charged at 0.5%, as with SDRT, but the total amount chargeable is rounded up to the nearest £5. Any transaction in which a sum of less than £1,000 is exchanged for shares will, as with SDRT, incur a charge of £5. However, if the sum exchanged for the shares was between £1,000 and £2,000, the Stamp Duty liability would be £10. As with SDRT, if you are given shares without exchanging them for anything then you will not be required to pay any Stamp Duty.
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Payment of tax
The way in which you pay tax on shares that you buy will again depend on the type of transaction that has taken place. If you are using CREST, the entire process should be automated and taken out of your hands; the system will automatically calculate how much tax must be paid, and your broker will forward this amount to HM Revenue and Customs. You will then be billed for your tax liability along with your broker’s fees. If you are paying Stamp Duty, however, you will be required to arrange payment directly to HMRC yourself through self-assessment.
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