STSM053070 - Depositary receipt and clearance services: 1.5 per cent higher rate charge: instalment arrangements - shares issued/transferred to a third party until the last instalment is paid

Sometimes, under the terms of an instalment arrangement, chargeable securities are to be issued or transferred and held by a third person (usually a custodian/nominee for the subscriber or purchaser) until the last instalment is paid by the purchaser.

In this situation, previously two different stamp tax scenarios could arise:

  1. When the final instalment is paid and the third person transfers the securities to a depositary receipt issuer (or its nominee) or clearance service (or its nominee) located anywhere in the world, a charge to Stamp Duty Reserve Tax (SDRT) at the rate of 1.5% arises, calculated by reference to the market value of the securities at the time of transfer (section 93 (6)(c) or 96 (4)(c) FA1986).
  2. The subscriber/purchaser acquiring new or existing securities may receive an instrument (i.e. an interim or substitute certificate) following an instalment payment giving the holder restricted rights over the securities until the securities are fully paid.   
  1. Where the purchaser transfers an interim/substitute certificate over existing UK company shares to a depositary receipt issuer (or its nominee) or clearance service (or its nominee), a 1.5% charge to SDRT arises on each interim certificate, calculated by reference to the amount of each instalment paid. The depositary receipt issuer or clearance service is liable for the tax.
  2. Where, upon subscription paid in cash, an interim/substitute certificate in respect of newly issued shares is simultaneously vested with a depositary receipt issuer or clearance service located anywhere in the world, no 1.5% SDRT charge arose. This was because HMRC accepted that the 1.5% SDRT charge on issues under sections 93(6)(a) and 96(4)(a) FA1986 was incompatible with European Union law. Accordingly, HMRC did not seek to collect 1.5% SDRT on the issue of UK company shares.

When, or following, on the occasion of the last instalment payment, the securities are transferred from the third party holding them to a depositary receipt issuer or clearance service (or its respective nominee) by an instrument containing a statement that the provisions of section 93 (6)(a), (b) and (e) or 96 (4)(a) (b) and (e) FA1986 are fulfilled, the amount of 1.5% SDRT chargeable is calculated by reference to:

i) the total of the instalments payable,

ii) less those instalments paid by a depositary receipt issuer/clearance service before the final transfer to the depositary receipt issuer or clearance service (or their respective nominee) is effected.

Background of the 1.5% charge

Following EU (HSBC Holdings plc and Vidacos Nominees Ltd v HMRC) and UK (HSBC Holdings plc and The Bank of New York Mellon v HMRC) court decisions in 2009 and 2012, HMRC recognised that the 1.5% Stamp Duty and SDRT charges on the issue of securities and certain transfers were incompatible with the Capital Duties Directive (Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital, and the predecessor directive, Council Directive 69/335/EEC of 17 July 1969).

Following this, in a 2017 decision the Court of Justice of the European Union ruled in the Air Berlin case that no 1.5% charge applied on the transfer of legal title in chargeable securities in connection with the listing of shares on a stock exchange.

UK legislation providing for the 1.5% charge on transactions of the types covered in these cases was not originally amended as taxpayers were able to rely on the direct effect of EU law up to and including 31 December 2023. However, the changes in the Retained EU Law (Revocation and Reform) Act 2023 meant that this would no longer be the case, so UK legislation was amended to prevent the 1.5% charge being reintroduced for these transactions.

The 1.5% charge on the issue of UK securities into depositary receipt systems and clearance services and on certain transfers was removed from domestic legislation with effect from 1 January 2024.

Guidance on these changes can be found at STSM053080 onwards.

Further Information

See STSM053030 for the meaning of ‘chargeable securities’.