STSM057055 - Depositary receipt and clearance services: exemptions/ reliefs: Hybrid Capital Instruments

For Stamp Duty and Stamp Duty Reserve Tax (SDRT) purposes Para 20 to Schedule 20 Finance Act 2019 exempts the transfer of instruments which meet the new definition of hybrid capital instruments (STSM021245 and STSM021245A provide more information on hybrid capital instruments) with effect from 12 February 2019.

Issuance of Hybrid Capital Instruments

That in turn means that from that date such instruments no longer meet the definition of “chargeable securities” as defined in section 99 Finance Act 1986 for SDRT purposes, and were therefore outside the scope of any 1.5% SDRT charge on issuance to a depositary receipt issuer (s.93 FA86) or into a clearance service (s.96 FA86). The charge on issues was removed from domestic legislation with effect from 1 January 2024.

The 1.5% Stamp Duty charge under s.67 and 70 FA86 does not apply to issuances.

Transfers of Hybrid Capital Instruments

As such instruments are not chargeable securities, then they are also outside the scope of any 1.5% SDRT charge on transfer to a depositary receipt issuer (s.93 FA86) or into a clearance service (s.96 FA86).

For Stamp Duty purposes, due to the exemption in FA19, Sch.20, para 20, no 1.5% charge arises on the transfer of such instruments to a depositary receipt issuer (s.67 FA86) or clearance service (s.70 FA86).

Clearance Services that have an election under section 97A Finance Act 1986

An operator of a clearance service can elect to be accountable for SDRT at 0.5% (s.87 FA86) on agreements to transfer ‘chargeable securities’ to, and within the system. (See STSM058010 and STSM058020).   

Should such an election under s.97A FA86 have been made by the relevant operator, then due to the exemption in FA19, Sch.20, para 20 no 0.5% charge under s.87 FA86 will arise on transfers of hybrid capital instruments to or within the clearance system.

Similarly, where a s.97A FA86 election has been made no 0.5% Stamp Duty charge will arise on transfers on sale of hybrid capital instruments to the system due to the exemption in FA19, Sch.20, para 20.

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.