What is stamp duty on shares?

The United Kingdom’s capital markets have long been regarded as among the most dynamic and accessible in the world. London retains a core role in global finance, acting as a strong magnet for capital inflows from governments, institutions and individuals.

But ever since the 2008 Global Financial Crisis, cracks have begun to show in the UK’s market competitiveness. And arguably, one of the more persistent obstacles to growth is the continued imposition of stamp duty on UK-listed share purchases.

Formally referred to as the Stamp Duty Reserve Tax (SDRT), this charge is levied at a rate of 0.5% on the purchase of most UK-listed company shares, typically applied automatically when shares are settled electronically through the CREST system. This tax applies only to purchases but is payable regardless of the outcome of the investment — though AIM shares, ETFs and derivatives are generally exempt.

This introduces a structural distortion in investor behaviour, especially given that the tax cannot be offset or reclaimed. Although 0.5% may appear small, it becomes a notable drag on compounded returns over multiple trades or when scaled up across large institutional portfolios.

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1. Learn more about UK shares
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4. Choose how many shares you’d like to buy
5. Place your deal and monitor your investment

Investors look to grow their capital through share price returns and dividends - if paid.

But the value of investments can fall as well as rise, past performance is no indicator of future returns, and you could get back less than your original investment.

Reducing investor returns

The most immediate impact of stamp duty is the initially imperceptible erosion of investor returns — because the tax is paid upfront at the point of purchase, reducing the amount of capital actually invested. And unlike capital gains or dividend tax, which is only paid on profits, stamp duty is incurred whether or not the underlying investment goes on to perform well.

In a competitive global market where transaction costs are increasingly scrutinised, even small fees can have an outsized impact on behaviour. For example, a pension fund allocating £10 million to UK equities would incur a £50,000 cost before the shares even had a chance to generate a return. As funds tend to rebalance multiple times over the year, the total cost becomes cumulatively higher.

This is clearly punitive for institutional investors managing large, diversified portfolios with frequent reallocations. Of course, retail investors are also affected, especially when they can happily invest in US shares or ETFs without incurring the duty. As fees shrink across the investing world, the flat rate of 0.5% on UK-listed shares stands out as both regressive and poorly targeted.

Distorting market behaviour

Stamp duty also influences how investors behave, often in ways that reduce overall market efficiency. One of the clearest shifts is that they hold onto positions longer than they otherwise would, simply to avoid paying stamp duty again — we also see this phenomenon with the housing market’s stamp duty.

This stickiness is potentially admirable when based on long-term confidence in a business, but when motivated by taxation, it reduces market liquidity and limits the speed of capital reallocation, which also weakens price discovery and market responsiveness.

Worse though, stamp duty has contributed to the preference among institutions to shift their exposure away from UK equities altogether. As global portfolios have become the norm, many fund managers are starting to choose easier geographies where trading friction is lower.

The result has been an outflow of capital from domestic equities, driven by a decline in UK stock ownership by domestic institutions. For context, during the 1990s more than 50% of UK shares were held by UK pension funds — this has now fallen to below 5%.

It’s also worth noting that many investors seek to avoid stamp duty, either by buying derivatives or ETFs that track UK indices but trade outside the UK. This diverts liquidity away from the underlying shares and reduces the capital directly supporting UK businesses.

Consequences for the London Stock Exchange

The London Stock Exchange has not been immune to the negative effects of stamp duty. In recent years, the number and value of UK IPOs has declined significantly — with growth stocks in hot sectors like technology and life sciences increasingly looking to New York for listings, attracted by the deeper liquidity, broader investor base and fewer transaction-related barriers.

Obviously, stamp duty is not the only factor as play. But when companies are deciding where to list, they are going to consider the total cost of capital for their future shareholders. A tax on buying their shares makes that cost higher, reducing potential demand and depressing valuations. Further, smaller companies thinking of upgrading from AIM to the Main Market also tend to view stamp duty as a deterrent — introducing a new layer of friction just as they are looking to scale.

There is also a longer-term reputational cost. As UK equities become relatively less attractive, the domestic market risks falling into a cycle of low liquidity, low valuation and diminished relevance. The cost of reversing this trend could be far greater than the short-term revenue gained from maintaining the tax.

And if stamp duty were abolished, the circa £3.3 billion (2023 figure) raised each year could even be generated from increased market activity instead. Research from the Centre for Policy Studies and Oxera indicates that abolishing Stamp Duty on UK shares could permanently increase the size of the UK economy by between 0.2% and 0.8%. The estimated fiscal impact ranges from a £1.9bn loss to a £2.8bn gain, meaning the reform could not only pay for itself, but actively boost public revenues.

International competitiveness

The UK is now an outlier on the world stage. Other global financial centres like the United States, Germany and the Netherlands do not impose a stamp duty equivalent tax. The US, in particular, allows shares to be bought and sold free of any federal transaction tax — and has been rewarded with deeply liquid markets and constant investor engagement.

Meanwhile, the UK persists with a flat 0.5% rate on most share purchases, a legacy approach that does not align with the demands of modern capital markets. While some western countries do impose financial transaction taxes, these are usually narrowly targeted (often on high-frequency trading or very large transactions). The UK’s broader-based approach places a financial burden on all investors, regardless of size, potentially deterring equity ownership in general.

Gone are the days where investing was controlled by a small cabal. The international mobility of capital means that investors can and do move to markets where their returns are not immediately penalised. And the UK market is, arguably, suffering for it.

The case for reform

Supporters of stamp duty often point to the tax’s revenue-generating role — which contributes some £3.3 billion annually to the government’s coffers. While not insignificant, this figure must be weighed against the opportunity cost of lost investment and reduced market liquidity.

The potential gains from reform could outweigh the static tax revenue, particularly if eliminating stamp duty sparked greater market participation, trading activity and inward investment.

The government could choose to abolish stamp duty entirely, bringing the UK in line with other major markets. Alternatively, a phased reduction might make sense, allowing the market to adjust gradually while giving the government time to model the tax impact.

On a broader level, stamp duty reform would send a powerful signal that the UK is serious about reasserting its leadership role in global finance. With increased competition from European and US exchanges, the UK needs to sharpen every tool at its disposal to retain market share and investor trust. Stamp duty is one lever where a relatively small policy change could unlock significant economic benefit.

How stamp duty discourages investment summed up

• Stamp duty reduces investor returns by charging 0.5% upfront on UK-listed share purchases, regardless of performance
• It distorts market behaviour by discouraging active trading and pushing investors toward overseas markets or exempt instruments
• The tax undermines UK market competitiveness, deterring IPOs and contributing to capital flight from domestic equities
• Although it raises £3.3bn annually, abolishing stamp duty could boost economic growth, market liquidity and overall tax revenues