Revenue Note for Guidance

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Revenue Note for Guidance

Section 87 Stock borrowing

Summary

Trades involving the sale of stocks and shares sometimes settle late or are only partly settled or do not settle at all because, for example, the seller fails to deliver some or all of the share certificates to his or her broker in time for the broker to complete the trade.

One option to enable the sale to be completed would be for the broker or dealer (the “stock borrower”) to obtain the stock required from a third party (the “lender”): the lender would transfer the stock to the stock borrower and the stock borrower would then use it to complete the trade. As part of the stock borrower’s contract with the lender s/he would agree to return to the lender an equivalent amount of stock within the period agreed between the stock borrower and the lender. As further security for the lender the stock borrower would transfer other stock to the lender as collateral. A stock borrowing operation, therefore, typically involves 5 transfers i.e.

(a) transfer of stock from the lender to stock borrower;

(b) transfer on of that stock by the stock borrower to complete the sale;

(c) transfer of collateral stock from the stock borrower to the lender;

(d) return of equivalent stock to the lender, and

(e) return of the collateral stock from the lender to the stock borrower.

The purpose of this section is to exempt transfers (a), (c) and (d) from stamp duty. (e) is not within the current charge to stamp duty.

Details

(1) The definition of “stock borrower” and “lender” covers bodies/entities such as companies and other corporate bodies, building societies, pension funds, charities, unit trusts, investment limited partnerships, collective investment funds, member firms of any recognised stock exchange, market makers recognised as such by any recognised stock exchange, authorised investment business firms within the meaning of the Investment Intermediaries Act, 1995 and persons acting in a nominee or trustee capacity for any of the above bodies/entities.

“collateral stock”, “equivalent stock”, and “stock return” are self-explanatory.

(2) The following are exempt from stamp duty:

  • a stock borrowing,
  • a stock return, or
  • the transfer of collateral stock to the lender.

(3) If equivalent stock is not returned to the lender within 12 months (applies to stock borrowing transactions entered into on or after 25 March 2005 – previously it was 6 months) from the date of the stock borrowing then—

  • the stock borrower will become liable to pay full ad valorem stamp duty on the stock transferred to the stock borrower by the lender;
  • the stock borrower will have to pay the duty within 14 days after the end of that 12 month period. If the duty is not paid within that time interest, at the rate of 0.0219 per cent per day (see section 159D) from the first day after the expiration of the 12 month period to the date the duty is paid, is payable. In addition, a penalty of 1% of the duty for each day the duty remains unpaid after the expiry of the 14 day period of grace is payable.

The stock borrower is regarded as having obtained the borrowed stock on the date the stock is transferred to the borrower on foot of the stock borrowing contract entered into with the lender of the stock. Where the transaction is effected in CREST, the relevant date would be the settlement date. In the case of a non-CREST transaction the date would be the date of the execution of the Stock Transfer Form.

(4) The stock borrower must maintain for a period of 3 years from the date of the stock borrowing, separate records of each stock borrowing and any stock return(s) made in respect of that stock borrowing.

Relevant Date: Finance Act 2014