What Is Stamp Duty Reserve Tax and When Do UK Investors Pay It?
Stamp Duty Reserve Tax is a 0.5% charge on UK share purchases that many investors overlook. Here's what it is and how to minimise its impact.
What Is Stamp Duty Reserve Tax?
Stamp Duty Reserve Tax — SDRT — is a UK government tax charged on the purchase of shares and certain other securities. At a rate of 0.5 per cent of the transaction value, it is levied on the buyer whenever they purchase shares in a UK company traded on a UK stock exchange electronically. It is separate from and should not be confused with the Stamp Duty Land Tax paid on property purchases, though both are forms of stamp duty.
When Is SDRT Charged?
SDRT is charged when you buy shares in UK-incorporated companies that are settled through the CREST electronic settlement system — which covers the vast majority of UK-listed shares. When you buy shares in a UK company through Hargreaves Lansdown, AJ Bell, Trading 212, or any other UK platform, 0.5 per cent SDRT is automatically added to the purchase price. You will see it itemised on your contract note. If you buy shares in an investment trust, SDRT is also charged at 0.5 per cent.
When Is SDRT Not Charged?
Several important categories of investment are exempt from SDRT. ETFs listed on a recognised stock exchange are exempt — this is one of the significant cost advantages of using ETFs over buying individual shares for UK investors. Shares listed on AIM (the Alternative Investment Market) are also exempt from SDRT, which is a deliberate government policy to encourage investment in smaller growth companies. Non-UK shares — US stocks, European equities — are not subject to UK SDRT, though they may be subject to equivalent taxes in their home countries. Gilts and most bonds are also exempt.
The Practical Impact of SDRT
For a buy-and-hold investor who makes infrequent share purchases, SDRT is a relatively minor consideration. If you invest £5,000 in UK shares, the SDRT charge is £25. Over a 20-year holding period, this one-off 0.5 per cent cost has a very limited impact on your total returns. However, for frequent traders who buy and sell UK shares regularly, SDRT adds up significantly. A trader making 50 transactions per year of £5,000 each pays £1,250 annually in SDRT alone — far more than the platform fees or dealing charges.
Why ETFs Have a Cost Advantage
Because ETFs are exempt from SDRT, a UK equity ETF like the iShares Core FTSE 100 ETF (ISF) — which holds the same underlying UK shares as you could buy individually — avoids SDRT entirely. The ETF itself pays SDRT when it buys the underlying shares, but this cost is spread across the full pool of fund assets and averaged into the fund's NAV. For retail investors buying and holding UK equities, doing so through an ETF rather than individual shares therefore offers a meaningful tax cost advantage in addition to the diversification and simplicity benefits.
SDRT vs Other Transaction Costs
When calculating the total cost of buying UK shares, investors should account for SDRT (0.5 per cent), the dealing fee charged by the platform, and the bid-ask spread (the difference between the buying and selling price of the share). For large-cap FTSE 100 shares, spreads are typically very narrow — often less than 0.1 per cent. For smaller or less liquid companies, spreads can be 1 to 3 per cent or more, adding substantially to the total transaction cost. Understanding and minimising these combined costs is important for investors who trade individual shares rather than holding diversified ETFs.
