STSM055160 - Depositary receipt and clearance services: scope of 1.5 per cent charge: Stamp Duty Reserve Tax - share reserve Dividend Re-Investment Plan - new issued shares

A Share Reserve Dividend Re-Investment Plan (Share Reserve DRIP) is similar to an optional stock dividend, except that the shareholder typically undertakes an advance “standing order” with the company to take part or all of future dividend payments in the form of newly issued shares rather than cash.

Where the shareholder elects to receive dividend payments in the form of new (unregistered) shares under a DRIP, the issuing company or its agent will use the value of the cash dividend foregone to subscribe for an issue of new shares out of the share reserve of the issuing company which are then distributed to the shareholder.

Where a shareholder elects, or a depositary receipt issuer or clearance service elects on behalf of an account holder, to receive a dividend in the form of newly issued shares in a United Kingdom 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 United Kingdom (UK) incorporated company with a specific intention to deliver to a depositary receipt issuer or clearance service located anywhere in the world 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.

For details of what is an ‘arrangement’, see STSM053050

Any subsequent appropriation or deposit of a share reserve DRIP, represented by shares in a UK incorporated company earlier received by a shareholder, to a depositary receipt issuer 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. See sections 67 (3), 70 (3), 93 (4)(c) and 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.