Policy paper

Stamp Duty and Stamp Duty Reserve Tax: Deep In The Money Options

Published 9 December 2015

Who is likely to be affected

Businesses or individuals who enter into option contracts over UK securities, and businesses which issue depositary receipts, or provide clearance services or Stamp Duty Reserve Tax settlement services.

General description of the measure

Where a registered UK company share is transferred as a result of the exercise of an option, Stamp Duty (SD) or Stamp Duty Reserve Tax (SDRT) is currently calculated and paid on the strike price (the amount paid as consideration for the share) rather than on the market value of the share.

This measure will change the SD and SDRT rules so that shares transferred to a clearance service or depositary receipt issuer as a result of the exercise of an option will be charged the 1.5% higher rate of stamp tax based on either their market value or the option strike price, whichever is higher.

Policy objective

An option to buy shares with a strike price far below market value is referred to as a Deep In The Money Option (DITMO). HM Revenue and Customs (HMRC) are aware of an increasing amount of avoidance in which DITMOs are created in order to transfer shares to depositary receipt issuers and clearance services. The result of this avoidance is that tax is only payable on the very low strike price rather than the full market value of the shares.

This measure makes the tax system fairer by removing the opportunity for avoidance arising on the transfer of shares using a DITMO. This is a targeted measure which only focuses on shares transferred to a depositary receipt issuer or clearance service as a result of the exercise of an option as this is where all the avoidance activity has been identified. All other share transfers will be unaffected.

Background to the measure

The measure was announced at Autumn Statement 2015.

Detailed proposal

Operative date

This measure will have effect from Budget Day 2016. It will apply to options which are entered into on or after 25 November 2015 and exercised on or after Budget day 2016.

Current law

Sections 67 and 70 Finance Act 1986 provide for a higher 1.5% Stamp Duty where securities are transferred to a nominee or agent acting for a person who issues depositary receipts for relevant securities or whose business is or includes the provision of clearance services. The charge is levied on the amount or value of the consideration for the sale, or (if the transfer is not on sale) the market value of the securities at the time the instrument is executed.

Sections 93 and 96 Finance Act 1986 provide for a higher 1.5% SDRT charge where securities are transferred to a depositary receipt issuer or a nominee or agent acting for a depositary receipt issuer or to a recognised clearance service or its nominee. The charge is levied on the amount or value of the consideration where the securities are transferred for consideration. In all other cases, the charge is levied on the open market value of the securities at the time of the transfer.

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to amend sections 67, 70, 93 and 96. This will mean that where UK securities are deposited with a depositary receipt issuer or clearance service following the exercise of an option, the transfer is chargeable to Stamp Duty or Stamp Duty Reserve Tax at 1.5% based on either their market value or the option strike price, whichever is higher at the date the instrument is executed (if the charge is to SD) or the date of transfer (if the charge is to SDRT).

Summary of impacts

Exchequer impact (£m)

2015 to 2016	2016 to 2017	2017 to 2018	2018 to 2019	2019 to 2020	2020 to 2021
nil	+35	+40	+40	+40	+45

These figures are set out in Table 3.1 of Autumn Statement 2015 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2015.

This measure supports the Exchequer in its commitment to protect revenue.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

Possible impacts on individuals (mainly high net-worth individuals) who deposit shares with a depositary receipt issuer or clearance service following the exercise of an option.

Information on the number of individuals this measure my affect is not available, but it is not expected to be significant due to the nature of the transaction involved.

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that this measure has any impacts on groups sharing protected characteristics.

Impact on business including civil society organisations

Possible impacts on the business of depositary receipt issuers, clearance service operators and settlement service providers. Also on businesses who deposit shares with a depositary receipt issuer or clearance service following the exercise of an option. Businesses affected will need to be aware of the new rules and calculate the market value. The ongoing administrative costs are expected to be negligible. Wider impacts on UK derivatives industry are not expected to be significant as share transfers made other than to a depositary receipt system or clearance service as a result of exercising an option will be unaffected.

The measure is not expected to impact on civil society organisations.

Operational impact (£m) (HMRC or other)

There will be no significant operational impacts as a result of this measure.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from settlement services and from tax receipts.

Further advice

If you have any questions about this change, please contact Stephen Roberts on Telephone: 03000 585455
or
Simon English on Telephone: 03000 585446 or email: stamptaxes.budget&financebill@hmrc.gsi.gov.uk