Stamp duty: the hidden truth

If you have been lucky enough to get on the property ladder, you will be familiar with stamp duty. For those that haven’t, it is a chunk of cash that you have to hand over to the government when you buy a house.

For house-buyers, the stamp duty is a land tax and the amount paid is relative to the purchase price of the property.

However, stamp duty also applied for those investing in the stock market, and in this case is known as Stamp Duty Reserve Tax (SDRT).

This 0.5% tax is charged when shares are bought electronically. For non-electronic deals, the charge is applied on transactions worth more than £1,000. At 0.5%, it may not seem much, but it easily adds up for frequent traders.

The income the government earned from the SDRT increased continuously year-on-year from 2002 to the start of 2008, when it took a sharp tumble as a result of the global financial crisis – plummeting 20%.

The decline continued, much to the government’s disdain, for a further six years before receipts rose significantly. Since then, SDRT has recorded stable year-on-year growth – netting the government a whopping £3.5m in the 2017/18 tax year.

However, there is a way to avoid this tax and still invest in the stock market. To maximise your investment, eToro absorbs the costs of stamp duty on UK stocks.

Your capital is at risk.

An investment in a company listed on London’s Alternative Investment Market (AIM), the place for relatively small firms, isn’t impacted by SDRT.

No one should ‘let the tax tail wag the investment dog’ or, to put it simply, do not make a bad investment just to save a couple of pounds in tax – but a lot can be said for a wise investment in a British tiddler.

In the first month and a half of 2019, the AIM rose 5.24%, almost on par with its elder brother the FTSE 100 index, which increased by 5.86%.

The UK is the only country that penalises its investors for buying British companies – buying in a market outside of the UK isn’t subject to a charge, and neither are investments in bonds issued by corporations or the government.

But with just over a month to go until the UK leaves the European Union – with or without a deal – will investors turn their backs on British stocks because of this additional charge, or could the volatile path provide an ideal opportunity despite the penalty fee?

Your capital is at risk.

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

Please note that CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.