STSM055070 - Depositary receipt and clearance services: scope of 1.5 per cent charge: Stamp Duty Reserve Tax - issue of a partly/ fully paid allotment letter or renounceable letter of allotment

Where, under the terms of a company share offer, a shareholder decides to take up the rights under a nil paid Allotment Letter (AL) or Renounceable Letter of Allotment (RLA) for further new shares, they may pay all or part of the subscription/purchase price on or before the offer expires.

In this situation, the issue by a United Kingdom incorporated company of a partly paid or fully paid AL or RLA deposited with a depositary receipt issuer or a clearance service at the request of the shareholder, is not subject to a 1.5% Stamp Duty Reserve Tax (SDRT) charge.

At the end of the renunciation period, no 1.5% charge arises on the issue of shares to a depositary receipt issuer or clearance service located anywhere in the world (that holds a partly or fully paid AL or RLA).

Where a person takes up a nil, partly or fully paid AL or RLA entitlement on shares which are held outside a depositary receipt or clearance service system, and later decides to transfer the underlying securities to a depositary receipt issuer or clearance service, a 1.5% charge may arise, calculated by reference to the market value of the securities at the time of appropriation by virtue of section 93 (4)(c) and 96 (2)(c) FA1986.

See STSM055030 for the meaning of an allotment letter and a renounceable letter of allotment.

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.