x Abu Dhabi, UAEFriday 21 July 2017

UK tax lifts the stamp of success from my profits

The profits in my fantasy portfolio are suffering from the inevitability of government taxes.

There are hidden costs to share trading, I discovered this week - and I'm not talking about the damage to one's soul. But before we go there, some gloating. This week, I graduated to the Ten Per Cent Club, which is to say my original fictional £15,000 (Dh84,930) investment became £16,500 - or, to be more precise, £16,560.23 (actually, a growth of 10.4 per cent, since you ask). Actually, there is no Ten Per Cent Club, but if there were, then I would be in it.

And all in just 10 weeks! Why, if I carry on at this rate, I could see growth of 52 per cent by the end of the first year ... and, of course, I won't, which is why people like me should never be allowed to fantasise in the vicinity of calculators, because, as it says on the tin, stocks can go down as well as up. Now, back to that hidden cost. I might be only fantasy trading, but because I am doing so on a UK-based platform, dealing in FTSE equities, I am exposed to the delightfully archaic UK tax known as stamp duty.

Stamp duty dates back to the 17th century, when Britain was at war (as usual) with France, and was designed to raise money for the crown by charging for any document that required an official stamp. And, funnily enough, the number of documents that required an official stamp multiplied exponentially overnight. This, I like to think, was the birth of bureaucracy. We won the war (though to be fair to the French, it did take us nine years and we did have Holland, Spain, Sweden and the Holy Roman Empire on our side), but the stamp duty was such a riotous success it has been part of the tax landscape ever since. Eventually, they even abandoned the pretence of the royal stamp and it became a handy device with which to impose tax on pretty much anything the government fancied - including the purchase of shares.

As things stand, the government charges 0.5 per cent on any share purchase over £1,000 and, because fantasy share trading needs to be as realistic as possible, there is an entire make-believe UK treasury out there slicing £5 off the top of every fictional £1,000 I pretend to spend. I would write to my imaginary MP, but he's yet to reply to a single letter I've sent. Every year, the London Stock Exchange and a gang of other vested interests make the case to the government that this tax - far higher than anything similar elsewhere - threatens London's role as a central trading hub.

What's more, they claimed in 2007, in a vain attempt to locate the Treasury's sentimental jugular, "ordinary savers and pensioners bear the brunt" of the tax. Arguing for abolition, the consortium claimed one effect of the tax was that it cut a typical occupational pension fund at retirement by between 1.52 per cent and 2.38 per cent, increased the costs of local government pension schemes and "also hits Child Trust Funds".

Furthermore, the group calculated that although the tax earned the Treasury about £3 billion a year, doing away with it would increase UK GDP, thus boosting other government tax income by £4bn. So that's the UK government for you: mean to children, pensioners AND shareholders. And me. This week, I took a close look for the first time at the contract notes that are issued for each transaction I make and discovered that since I began trading on June 3, I have made 26 purchases with a value of more than £1,000, to a total cost to me of £269.82 in stamp duty.

It doesn't sound like much, but actually adds up to a tax of 1.8 per cent on my £15,000 in just 10 weeks. So this got me thinking. What if I dodged the tax altogether, by limiting my purchases to amounts less than £1,000? For this to work, I would have to carry out 15 separate transactions - either for 15 different stocks or the same one 15 times. There is, however, another snag, and one that could make this "little and often" ploy costly in another way.

I deal online through The Share Centre, which, like most such operations, levies a fixed commission of £7.50 on every transaction, whether buy or sell. This obviously favours infrequent trading but, while no doubt the big investment houses have entire floors of people working on managing this very margin call, quite how to balance this with the opposing factor of stamp duty is, frankly, beyond me and my calculator.

Suffice to say that my total of 44 buy-or-sell trades since June 3 have cost me £330 in commission - and that commission and stamp duty have added up to an overhead of £600. All of which brings me to my next move. Having last week piled all my money into just one stock - the miraculously performing Old Mutual - I now find myself blinded by the headlights of its success. What I should be doing, of course, is reaping the harvest of my spectacular profit and reinvesting it in some other shares - a portfolio of about five would be about right.

But now I am trapped in that Vegas vortex - the moment when you are winning and your mind says: "Get out while you're ahead" and your anti-mind says: "Keep rolling while you're ahead." Well, come on! Can you blame me? Up 32 per cent, Old Mutual peaked at 147.3 pence this week - lifting my £15,000 investment, briefly, to a new high of £17,574.36, though it did fall back to a still incredible £16,560.23.

So, greed dictates that I'm going to give it just one more week before I slim down my exposure to Old Mutual, grow up and find some new friends to play with. Watch this space (the one between my ears).

jgornall@thenational.ae