The UK hobbles not just financial services but any business operating on the London stock exchange by levying a tax on share purchases, writes Emma Revell
Say you wanted to boost investment in UK-based companies. And people’s pensions pots to be larger. And the valuations of British companies to be higher. And to make the City of London more competitive. And to increase liquidity in the markets. And to do it all without costing the Treasury any money – in fact, probably boosting the tax take in the process.
Sounds like a pipe dream, doesn’t it? But there’s a simple step that Jeremy Hunt could take to make it happen: abolishing stamp duty on shares.
As most people who work in the markets know, the UK – despite ferociously opposing a financial transaction tax when it was suggested by the EU – imposes exactly such a tax on a wide range of share purchases. In most other major financial centres, the levy is either much lower, or simply nonexistent.
Recently, politicians from both left and right have said they want to ensure there is more capital to invest in the City, that a healthy financial sector is key to boosting business and unlocking solid returns for investors and savers.
Back in 2007, before the financial crisis, a range of blue-chip financial institutions – the City of London, the Investment Management Association, the Association of British Insurers and the London Stock Exchange – commissioned the respected consultancy Oxera to evaluate the economic impact of abolishing this tax. It found that it could have significant economic benefits, at no net cost to the taxpayer.
We at the Centre for Policy Studies think tank thought it was rather odd that no one had repeated the exercise. So we decided to do so. When Oxera re-ran the numbers, at our request, they found that abolishing stamp duty on shares would be expected to generate a one-off increase of four per cent in UK equity valuations, amounting to a £99.8bn capital gain. In the long run, there could be a permanent increase in GDP of between 0.2 per cent and 0.7 per cent, alongside an increase in annual business investment by FTSE All Share index companies of up to £6.8bn. It would also increase the size of a representative DC pension fund by the equivalent of £6,051 – more, if it was heavily weighted towards equities.
And, crucially for the Treasury, it’s likely to be revenue-positive. By promoting wider growth and investment, and increasing share prices and pension pots, Oxera’s mid-point estimate is that it would increase the overall tax take by around £600m.
Despite pressure from UK Finance and TheCityUK, there has been little indication from the Treasury that they intend to abolish the tax when the Chancellor stands up on Wednesday – but that doesn’t mean it isn’t ripe for reform. After all, this is an election year.
Manifestos will be being drawn up and Labour, just as much as the Conservatives, seem keen to position themselves as friends of the City. Take Rachel Reeves promising to “unashamedly champion our financial services sector as one of the UK’s greatest assets” as an example. The Chancellor himself has set out a range of measures, through his Mansion House and Edinburgh Reforms, to boost London’s international competitiveness.
The UK hobbles not just financial services but any business operating on the London stock exchange by levying a tax on share purchases which most of its competitors do not. Abolishing it would deliver a much-needed boost to our key financial centre and unlock additional money to grow pension pots.
If political priorities or financial realities don’t leave room to abolish the tax on Wednesday, it’s a manifesto pledge worth considering, regardless of which party you’re looking at.