STSM055150 - Depositary receipt and clearance services: scope of 1.5 per cent charge: Stamp Duty Reserve Tax - optional share reserve stock dividend paid with an issue of shares
An optional share reserve stock/cash dividend represents an arrangement whereby a shareholder may elect under the terms of a United Kingdom (UK) incorporated company’s Articles of Association to take part or all of a dividend payment in newly issued shares rather than cash.
Where the shareholder elects to receive the dividend payment in shares, the value of the cash dividend foregone will be used to subscribe for an issue of new shares out of the share reserve of the company that are then distributed to the shareholder as a share reserve stock dividend.
In the situation where a shareholder elects, or a depositary receipt or clearance service system located anywhere in the world elects on behalf of an account holder, to receive a dividend in the form of newly issued shares in a UK incorporated company which are to be simultaneously delivered to a depositary receipt issuer or clearance service, no 1.5% SDRT charge will arise.
Any subsequent trading or renunciation of dividend shares in a UK incorporated company with a specific intention of simultaneously delivering them to a depositary receipt issuer or clearance service may, however, give rise to a 1.5% Stamp Duty or SDRT charge by virtue of sections 67 (2), 70 (2), 93 (4)(b) or 96 (2)(b) FA1986.
Where dividend issued shares in a UK incorporated company are later traded and the registered shares are transferred, and an ‘arrangement’ is entered into before or at the time of the purchase to deliver such securities to a depositary receipt issuer or clearance service, the 0.5% SDRT charge that would otherwise apply under section 87 FA1986 is cancelled by the provisions of section 90 (4) FA1986 and offset by the 1.5% SDRT charge that arises under section 93 or 96 FA1986.
Any subsequent appropriation or deposit of an optional share reserve stock dividend, represented by shares in a UK incorporated company previously received by a shareholder, to a depositary bank or clearance service is subject to a 1.5% charge, calculated by reference to the market value of the securities at the time of appropriation by virtue of sections 67 (3), 70 (3), 93 (4)(c) or 96 (2)(c) FA1986.
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.