STSM057070 - Depositary receipt and clearance services: exemptions/ reliefs: replacement securities

There is no 1.5% Stamp Duty Reserve Tax (SDRT) charge when chargeable securities held in a depositary receipt or clearance service scheme are cancelled and replaced by ‘new securities’ that are issued, transferred, or appropriated by the same company.

This situation commonly occurs where a company decides to undertake a ‘stock split’ of its issued share capital, for example, by cancelling, say, every ordinary 50p share in circulation and replacing it with two ordinary 25p shares to the same value, or by re-denominating its share capital into a different currency.

The exemption under section 95A or 97ZA FA1986 applies in respect of the transfer or appropriation if all of the following conditions are met:

  • The ‘old securities’ are held under a depositary receipt or clearance service scheme; and
  • There was a 1.5% SDRT charge when the ‘old’ securities were initially transferred (on sale or otherwise than on sale) to a depositary receipt issuer or clearance service, or
  • A 1.5% charge arose on earlier securities transferred to either scheme in relation to which, on a previous application of section 95A or 97ZA FA1986, those securities were the new securities; and
  • There would have been a charge to 1.5% SDRT but for the provisions of section 95 (2) or 97 (3) FA1986 and
  • The ‘new securities’ are transferred or appropriated to a depositary receipt or clearance service scheme and the old securities are cancelled; and
  • The value of the new securities does not exceed the value of the old securities.

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.