Implications of the upcoming changes to the stamp taxes regime on employee incentive arrangements

As part of a much-anticipated overhaul of the stamp taxes regime, HMRC has confirmed that the current stamp duty and stamp duty reserve tax regimes shall be replaced in 2027 by a new mandatory, single self-assessed tax on securities (the New Regime).

In the government’s Tax update spring 2025, HMRC published its response to the feedback received from its April 2023 consultation on the reform of the stamp duty regime. HMRC’s response signifies its ongoing efforts to modernise, simplify and digitalise the UK tax system by allowing taxpayers to use an online portal to pay stamp duty when the new legislative framework is introduced in 2027.

Although not directly relevant to employee incentive arrangements, the New Regime may have some interesting consequences on the way employee and manager equity is dealt with.

Key changes proposed by the New Regime

Key changes to the stamp taxes regime affecting employee incentives include the following:

1. mandatory tax - Stamp duty will no longer be a “voluntary tax” and the purchaser (which could include new joiners or option holders exercising their options) will be liable for paying it
2. digitalisation - An online portal to digitalise the reporting and payment of current paper-based transactions will be developed, with a Unique Transaction Reference Number (UTRN) generated immediately on submission of the tax return. This will allow the company registrar to write up the register of members on receipt of the UTRN (i.e. on the same day)
3. accountable person - The purchaser will be liable for the tax, but the online portal will also allow agents, such as legal advisors and accountants, to register as the "accountable person" for paying the tax on behalf of the purchaser
4. removal of the £1,000 de minimis exemption - The £1,000 de minimis exemption (treating transactions with consideration of less than £1,000 as exempt from stamp duty) will be removed. HMRC plans to reduce the administrative burden caused by this change through providing the facility for the portal to produce the stock transfer form (STF), SH03 or certificate of confirmation with the UTRN included
5. late notification penalties - Late notification penalties will be changed to a percentage-based regime

Benefits of the New Regime for share plans

The New Regime aims to modernise the method of stamp duty payment, through a digitalised system, similar to that currently used to pay Stamp Duty Land Tax. The fact that a UTRN will be issued immediately upon submission of the tax return makes same day stamping a welcome reality. Following the implementation of the New Regime, there should be no need to enter into declarations of trust (to transfer the beneficial interest in shares) where stamp duty is payable, but there is currently not enough time to receive an authentication code from HMRC (e.g. where options are exercised on the same day as completion of a sale of the relevant option shares). 

Overall, the new digital streamlined processes should reduce the time, administrative burden and associated costs for companies implementing share plans and making stamp duty applications.

Potential challenges for share plans

The main challenges arise from HMRC’s intention to remove the £1,000 de minimis exemption that currently exists for stamp duty. This will create an additional burden for purchasers of shares and option holders exercising their options, as well as employee benefit trusts (EBTs) regularly involved in transferring shares to employees, due to a need to fill out a STF and pay stamp duty in respect of the transfer of shares, where the low level of consideration involved was previously exempt.

Option holders will be personally liable to pay stamp duty whenever they exercise their options, whatever the consideration. On a transaction requiring the exercise of options prior to completion (where options are satisfied by the transfer of shares rather than an issue of new shares), any such exercise will incur stamp duty and this must be paid by the option holder before completion. Any advisor will be familiar with the potential difficulties of arranging for multiple option holders to sign option documents, often in short time-frames. Therefore, in order to streamline the stamp duty process prior to completion, legal advisors may need to be authorised by the option holders to pay stamp duty on their behalf. With this in mind, effective wording should be built into the option exercise documents to grant such authority and avoid potential delays to the transaction.

Changing stamp duty from a “voluntary” tax to a mandatory tax, with the purchaser liable to pay also adds a cost to employees participating in equity incentive arrangements which historically have often been borne by the company setting up the arrangements. Going forward, it seems that if a company wants to cover this cost for its participating employees, it will need to “gross up” the tax as it will be paying the employee’s tax liability on their behalf (which is considered a taxable benefit under general tax principles).

Looking ahead

It is encouraging to see that the government is progressing much-needed reform to the stamp taxes regime and it will be interesting to see how the new digital system works. We expect that companies will find it easier to make stamp duty submissions themselves, however, they will need to be prudent in doing so for every share transfer (including where options are exercised) to avoid penalties accruing. 

As the New Regime legislation is being drafted, HMRC should consider several critical points to ensure the successful implementation and operation of the legislation. Key considerations include:

• providing clear guidance and support for companies transitioning to the New Regime
• ensuring that the new legislation is comprehensive and addresses potential loopholes
• ensuring it is quick and simple for purchasers to appoint an agent to pay stamp duty on their behalf
• engaging with stakeholders to gather feedback and ensure that the regime meets the needs of businesses and employees, making swift adjustments to the regime where necessary.