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In his Autumn statement Chancellor George Osborne has announced that from April 2014 the UK government will remove the stamp duty and stamp duty reserve tax (SDRT) charge on purchases of shares in exchange-traded funds (ETFs) that would currently apply if an ETF were domiciled in the UK.
Most ETFs currently escape the tax because they are domiciled overseas, typically in Ireland or Luxembourg. Therefore the current change will be in relation to ETFs which are established in the UK.
While the abolition does raise the prospect for more ETFs to be set up in the UK by improving the tax environment, of potentially greater significance is the positive signal it conveys about the UK government’s view of the ETF industry and the broader financial services industry in general.
Monica Gogna, a partner in the financial regulation team at law firm Pinsent Masons, said: “It is heartening to hear the Chancellor’s move to support the financial services sector demonstrated by the move to abolish stamp duty for ETFs. This is surely another sign that the ETF industry in Europe is set to grow and compete with the much larger ETF sector in the USA.”
Mark Johnson, head of UK sales at iShares, the world’s largest provider of ETFs, commented: “Today we welcome the news that, starting from April 2014, the UK government will remove the stamp duty and stamp duty reserve tax on purchases of shares in ETFs, which would currently apply if an ETF were domiciled in the UK. This should ultimately increase consumer choice and support the growth in the use of ETFs by a wide range of investors from retail through to pension funds and insurance companies.”
Matt Johnson, Head of Distribution EMEA at commodities-focused ETF Securities, remarked: “Whilst the news doesn’t have a particularly large impact on the exchange-traded product (ETP) industry as so many products are domiciled outside the UK, it is excellent to see that right up to the top of the UK government the ETP industry is well understood. In a world where we are witnessing increased regulation as well as taxation of financial products, it is very encouraging to see a government recognising the importance of this industry to investors and taking steps to minimising the costs of ETPs.
He added: “ETPs globally have seen exceptional growth over the last few years to over $2.4 trillion and anything that can help accelerate the pace of European growth is welcomed. This move is likely to encourage more asset managers to have ETFs domiciled in the UK.”
Meanwhile, Hector McNeil, Co-CEO of short and leveraged ETP specialist Boost, said: “The news from the budget today on stamp duty and ETFs is an interesting one. This only impacts ETFs that track and hold UK-listed securities. Many people won’t realise that stamp duty has any impact on an ETF, but it does. On a creation of the initial ETFs (physical only and not swap backed) stamp duty is/was charged, but never on the trading of the ETF itself. The stamp however is/was not repaid on a redemption. Due to this the ETF would trade at a premium of 0.50% to reflect the stamp. This should now go away and should be a benefit to an investor in terms of performance and reducing costs.”
He added: “The budget doesn’t state if this affects mutual funds or not. If it doesn’t then this is a major advantage for ETFs as they will cost even less and track better compared to mutual funds. The one puzzling statement is that the expected result is fund companies will base ETFs in the UK now. I really don’t see this happening and suspect fund companies will continue to domicile in Ireland and Luxembourg.”…
The positive sentiments were echoed by the London Stock Exchange which put out the following statement: “London Stock Exchange Group welcomes the Chancellor’s decision to abolish stamp duty on ETFs, as well as his confirmation of the abolition of stamp duty on AIM shares from next year. Removing stamp duty on ETFs and AIM shares, effectively a financial transaction tax, is a powerful signal to investors, particularly retail, that access to our markets is open and transparent.”