Avoidance of Stamp Duty

TL;DR version:
Do you plan to offer any way of avoiding stamp on FTSE100 constituents?

Long version:
I’ve seen a couple of other threads on Stamp Duty, but they always seem to get derailed onto other subjects, like leverage for instance, or focus on asset type.

For avoidance of doubt, this is not about margin, leverage, asset type.

Put simply, 0.5% of deal size is an intolerable drag on profit for anyone with a holding period of a couple of weeks and a large diversified portfolio (holding the entire universe of FTSE100 for instance). If you compare this with existing broker spreads/commissions on CFDs (solely for the purpose of stamp exemption), the 0.5% will dominate.

If your holding period is 6 months and/or you aren’t holding a diversified portfolio, then the stamp problem makes this a non-starter (i.e. cheaper options out there already).

In short, stamp is a killer. If the govmt imposed it on all delta1 derivatives on LSE main market underliers, it would literally kill the market. Which is why I think they don’t do it.

Stamp is as good as a (huge) commission from a broker.

It’s a legal requirement on the transfer of existing shares. How would Freetrade avoid it? As far as I know, EFTs are outside of the stamp duty requirement, at least the ones I have didn’t have it levied.

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By offering a 1x leverage delta1 derivative (something cash settled, like a CFD). If I can trade a CFD at 1x leverage with a broker and avoid stamp duty, then the brokers fees are going to have to be pretty hefty to make even a free trade on the underlier preferrable. And there are brokers out there who charge a lot less than 0.5%. IB for instance.

Freetrade have said that they are not aiming the product at traders, but at investors and they have no intention of offering those kinds of products.

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I’m not sure freetrade are planning to add any type of derivative at this stage (or ever). Compared to standard broking accounts freetrade is going to be offering a substantial saving without trying to avoid stamp duty.

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I think your issue is with HMRC, stamp duty is a tax and unavoidable when purchasing shares. The only way to avoid it would be for FreeTrade to pay it for you, which will never happen (terrible business model). As I’m sure you are aware a CFD is not a purchase of a share so not subject to stamp duty. FreeTrade is not a trading app, or does not have plans to become one (at current). As you say, there are many apps for trading derivatives, with some being cheaper than FreeTrade.

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If I’m an investor and hold for a year, I’d still be better off executing a CFD through a broker and avoiding stamp. Because stamp is huge. Because of stamp, there are cheaper solutions for main market trading already out there. Why would you create a system that’s more expensive than existing solutions already in place? That doesn’t make sense.

This just goes for the UK main market of course.

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Yeah, think you’re right Jack. Thanks.
If you’re in infrequent trader, txn costs aren’t really a big deal compared to the movement in your underlier. I’m not sure there’s a market for what you’re selling, for the UK at least.

In 2017 there were 8.62 million people in the UK that had a stocks and shares isa. You’re aware that in those you can’t trade in derivatives so at the very least there are 8.62 million people that are doing something (paying trading fees per buy/sell) you seem to be saying there isn’t a market for?

Am I missing something?

@gadb if stamp duty on UK stock is a significant factor, why not consider a different stock market strategy, like trading US and EM. Or, er, not doing 2-week trades? But like you say, other platforms will offer CFDs so.

ISAs can’t have CFDs I guess, so depends on user.

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I don’t mean to sound rude when I say this, so apologies in advance if I do…

…I don’t think you are Freetrade’s primary target audience. I believe, somebody may correct me, they’re after the ‘everyday investor’ aiming to build wealth over the long term - not short.

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I’m saying, for people who buy and hold, txn costs aren’t a big deal. There are very cheap options out there. Interactive Brokers are a good example of an ultra cheap broker (NOTE: there must be others, I don’t work for these guys and I don’t love them either). Perhaps not as cheap as you guys, but very close and with the full gambit of services. I don’t think any investor in this camp would notice any difference to their final balance based on the difference between your costs and theirs. Fractions of a 10th of a percent.

No offence taken at all. And if I sound sceptical, part of it might be my disappointment at FreeTrade not being cheaper for me than the competition. :slight_smile:

The ISAs thing is a good point.

All I’d say in summary is - markets are extremely efficient in the long term. If you think you can outperform the market in the long term, kudos to you. I don’t think I could. If I were holding for the long term, I’d buy the market (ETF) and forget about it.

Good luck y’all.

Yeah, I thought about that. All my back testing and data is the UK main market though. I guess I could switch but it wouldn’t be without some pain.

ETFs do pay stamp duty when they buy underlying companies. That’s why ETFs try to minimize churn by keeping a bit of cash. Hence many ETFs that invest mostly in the UK companies can have transaction costs less than 0.5%. long term etf annual management fees and transaction costs do add up. So I am pondering to buy individual shares, despite that it leaves me with like single stock exposures. But I also had enough of owning oil & tabacco companies. And the warm fuzzy feeling from owning wind farms makes me happy.

If you save monthly they are significant (whereas stamp duty is not). Also fees are very significant, so low flat fees are very important for long term investing.

You can do that on freetrade. You can also avoid stamp duty by not buying things where it is imposed (there is no other way to avoid it).

From IB’s website (I’m not saying IB are great or the best - I’m not a stooge!)
Main market equity costs (for the typical investors you’re describing, I think) -
<= 40,000,000 0.050% GBP 1.00
So if you save monthly, small amounts, you’ll pay 12 quid a year.
I’m not sure for which investor that’s a significant amount?
(Breakeven on fixed vs variable is 2k)

If anybody wants to avoid stamp duty then I guess they’ll go elsewhere then. But experience tells me that trying to avoid tax policy is a race against time, you’ll be forever moving investments around in search of this and incur additional risk / costs in the process of doing so.

I’ve no issue paying for it for UK based stocks where i have to, if it does become a drag on profits then I can switch to markets where Stamp Duty isn’t levied.

Just out of curiosity, why does 0.5% at the point of purchase become “an intolerable drag on profit”? It’s a one-time cost, I could understand this thinking if it was a recurring annual cost.

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What I’m saying is:
For medium term traders (weeks not months), stamp duty is intolerable.
For long term traders any advantage you offer is minuscule, and likely obliterated by smart execution offered by most brokers.
So I’m saying, I don’t think you have a viable business for a rational (profit optimising) investor of any time frame for the UK main market, because of stamp duty.
But that’s just the UK main market right? I care about that, but I bet a lot of your customers can live with it.
I disagree with your suggestion stamp duty is going to be applied to derivatives priced off the main market. For starters, it would kill the market - How could market makers hedge with that degree of cost? Other markets don’t have stamp - a major impediment to efficiency and liquidity. Also, the momentum is in the other direction (AIM and ETFs now exempt. Continued pressure for main market shares to have stamp abolished).