(Bloomberg) -- Scrapping stamp duty on shares would be a key step to help revive Britain’s flailing stock market, according to analysis by Peel Hunt, which predicts that such a move would boost investment inflows and encourage more companies to list in London.

The UK has among the highest levels of tax for stock transactions, Peel Hunt analyst Charles Hall noted, describing stamp duty as “a pernicious tax that is having a material impact on UK equity markets.” 

While the UK levies 0.5% on shares, trading venues in the US, Germany and Australia have no stamp duty, according to Peel Hunt. The UK also exempts cryptocurrency, ETFs, contract-for-differences and spread-betting transactions from stamp duty, which drains liquidity from equities in favor of such instruments, Hall wrote in a note Monday. 

“It is clear that stamp duty should be removed as part of a series of reforms to help the recovery in UK capital markets,” he said. “Whilst this would reduce tax in the very short term, it would materially raise tax due to enhanced economic activity and increases in other taxes.”

A 10% increase in demand for UK shares would add £250 billion ($315 billion) of value to the domestic market, with almost half of that accruing to UK-based shareholders, Peel Hunt’s analysis shows. Removing stamp duty would also encourage companies to list in London, and increase the relative attraction of British equities for pension funds, according to the note. 

What’s more, stamp duty on shares earned the government £3.3 billion last year, equivalent to just 0.3% of total UK tax revenue, Peel Hunt said, adding that the take has not increased in 20 years.  

Chancellor of the Exchequer Jeremy Hunt is under pressure to help boost the bourse’s fortunes, after investors pulled a record $28.8 billion from UK equity funds last year, according to EPFR Global data. Domestic pension funds too have been investing elsewhere, holding just 1.6% of UK-listed stocks as of 2022, compared to about a third in 1992, data from the Office for National Statistics shows. 

And falling UK market liquidity and share valuations have prompted several companies, including CRH Plc and Ferguson Plc to move their primary listings to the US. A particularly harsh blow for London came last year, when Arm Holdings Plc picked New York for its high-profile stock market return. All in all, one in five listed companies has vanished in the past five years, Peel Hunt estimates.   

One proposal Hunt is considering is the creation of a so-called British ISA, a tax-free savings account for investing in domestic stocks. He said last week he is open to the idea, though it is unclear if he will introduce the measure in his March 6 budget presentation. 

Hall said initiatives such as the British ISA would be helpful, implemented alongside stamp duty reform. He acknowledged that rather than immediately scrapping stamp duty in its entirety, “a more targeted approach might be more palatable” to authorities. To this end, he advocates removing the tax on small and midcap stocks while “materially” reducing it for larger companies. 

 

 

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