When US hedge fund Elliott Management moved to buy a stake in BP last year, there was more to the purchase than met the eye.
On the face of it, the fund had acquired about 800,000 of BP’s publicly traded shares for £3.8bn. But on closer look, it emerged that Elliott had in fact bought only about 100 BP shares, worth a measly £360.
How had Elliott managed to acquire £3.8bn of BP and spend just £360? The answer was that most of the shares had been bought by an investment bank on Elliott’s behalf using complex derivatives.
This gave Elliott artificial ownership of the BP shares – drastically cutting its tax bill.
Buying such a large stake in a FTSE 100 giant would normally incur a hefty stamp duty tax liability.
But by using a derivatives contract with a bank known as an equity swap, no shares changed hands, meaning Elliott probably paid just £1.80 in stamp duty – and saved £14.5m in tax.
Elliott is far from alone in spinning together complex deals to avoid stamp duty, a practice that is entirely legal.
While stamp duty has been billed as a tax on the City, it’s almost entirely paid by ordinary pensioners and savers, while the most sophisticated investors employ heavy use of derivatives to avoid it.
According to figures, just 14pc of trades on the London Stock Exchange in the first quarter of the year were subject to stamp duty, while only 11pc of trades paid stamp duty last year.
The contrast between high-rolling hedge funds avoiding stamp duty and pensioners having to pay is, for some, another damaging example of how London’s stock market has been left to wither on the vine by the Treasury.
Flows in UK stock market funds have been negative for years. In the past 12 months, £14bn flowed out of funds, according to Calastone.
Leaving London
Companies are also leaving London at a record rate, and coupled with a dearth of new listings, the centuries-old market is lurching into a death spiral.
Stamp duty has been blamed for fuelling the decline, gumming up the stock market and suppressing liquidity.
The tax, which is charged at 0.5pc, is overseen by the Treasury. It brought in £4.3bn to the exchequer in 2024, up roughly a third from the year before.
Although the Treasury has made some small changes – Rachel Reeves announced last year that stamp duty would be exempt for companies listing on the stock market – the Government has been unwilling to go further.
Without action, many in the City fear that stamp duty will further dampen enthusiasm for the stock market, all the while making it more attractive to overseas funds looking to lure away the best of Britain’s public companies.
