In Finance, what is Stamp Duty?

Brenda Scott

In finance, a stamp duty is a tax placed on certain legal documents or publications. The tax received its name because payment is generally certified by attaching or marking the document with an official stamp. In some areas, the duty is an ad valorem tax, or a flat rate charge that is not tied to the value of a purchase. In other regions, or on specified items, the tax can be based upon a percentage of the value of the item in question.

Man climbing a rope
Man climbing a rope

There is no stamp duty in the United States, probably due to the unpopular reaction of the colonies to the Stamp Act of 1765. This law required all legal documents in the colonies to be printed on government-issued stamped paper. The taxes raised were to be spent on maintaining a protective military presence in the colonies. Reaction to the bill was negative, primarily because the tax, which only applied to the colonies, was passed by a Parliament in which they were denied representation. The Stamp Act became a unifying issue between disparate groups and helped lead to the American Revolution.

Stamp duty is a common tax is many other parts of the world. In the United Kingdom, a stamp duty land tax (SDLT) is charged on the purchase, lease or other forms of ownership transfers of land or property. The amount of the duty is usually a percent of the value over a certain threshold. The duty is generally not charged on inherited land or property transferred as part of a divorce decree. Payment is made through filing a SDLT return with HM Revenue and Customs within 30 days of completion of the transaction.

A stamp duty reserve tax (SDRV) is charged on the purchase of stocks and securities through the stock market, a stock broker or a third party such as a bank. The amount due is based upon a percentage of the amount paid for the stock, not on its value. If a person is given stock for free, he is not required to pay the duty; if he receives stock at a discounted rate, the tax is only figured on his cost, not on the actual value of the security.

In Australia, stamp duty is collected by the states and not the federal government. It is generally imposed upon rental agreements, life insurance policies and title transfers resulting from gifts, insurance policies, home loans or the sale of real estate, vehicles and business property. First time home buyers are exempt from the tax if their home is priced under a certain threshold. For subsequent purchases, the tax is charged on both the home and the mortgage. Revenues collected through this medium are used to fund education, health care, law enforcement and public safety.

In the UK,the stamp duty is levied on buyers. Japan levies the tax on sellers, and France charges both parties. India requires all legal documents to be printed on stamp paper, and only those items so executed can be introduced into a court as evidence. Canada, like the US, does not charge a stamp duty.

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