HM Revenue and Customs lost the HSBC case on stamp duty reserve tax in February, but did succeed in arguing that the American Depositary Receipts concerned did not give their holders beneficial ownership of HSBC shares.

HMRC has revised its capital gains tax guidance on ADRs following the case, but will still treat ADRs as giving their holders beneficial ownership of the underlying shares.


As readers may recall, this February brought a decision on the UK’s 1.5% “season ticket” charge to stamp duty reserve tax on the issue of shares to a depositary receipt system. The UK’s First-tier Tax Tribunal concluded that EU law did not allow the SDRT charge to be levied on the issue of HSBC’s shares into a depositary receipt system in the United States.1 On 27 April HMRC announced that it would not be appealing the FTT’s decision and that it would refund overpaid SDRT.2 HMRC has since been working through some of the other implications of the decision.


EU law was not HSBC’s only basis of attack on the charge. The bank also argued that the holders of its American Depositary Receipts had beneficial ownership of the underlying shares. Investors who opted to receive ADRs rather than have shares issued to them directly already had a beneficial interest in those shares. Accordingly, the transfer of the shares into the depositary receipt system was a transfer of bare legal title – and that was not liable to the charge.

Moreover – said HSBC – it was not open to HMRC to take the line that an ADR holder was not the beneficial owner of the underlying shares: HMRC’s published manuals stated that it would treat the holder as the beneficial owner of the shares, in particular for capital gains purposes. (Indeed, this has been HMRC’s practice for many years.) The FTT responded that HSBC would have had to raise that argument in separate proceedings under UK administrative law, on the basis that HMRC was bound in practice by its published statements. The FTT had no jurisdiction to consider it.

Did the ADR holders have an English law beneficial interest in the shares underlying the ADRs? The FTT had to decide as a matter of fact what the ADRs were, in order then to analyse them from an English law perspective. It heard evidence on the nature of the ADRs in New York and US law from experts for HSBC and HMRC.

The experts agreed that under the arrangements ADR holders were given substantially the same economic rights as shareholders, but they disagreed on whether holders had a beneficial interest in the underlying shares. The view of HMRC’s expert was that the holder of an ADR had no proprietary interest in the underlying shares and collateral. The FTT accepted this.

Of course, this part of the FTT’s decision is in no way conclusive of the US legal position. But the nature of an ADR does have implications for their UK tax treatment, and the decision has caused HMRC to revisit some of these.


Since deciding not to challenge the HSBC decision, HMRC has been grappling with its consequences for the capital gains tax treatment of ADRs.

  • On 23 April it revised its guidance to say that it was still considering the decision, but accepted that the holder of a typical ADR would not be the beneficial owner of the underlying shares.
  • On 15 May it issued a brief moving away from that position: it acknowledged that the HSBC decision was not binding in other cases and said it would “continue to treat ADRs as conferring beneficial ownership as according to its established interpretation of the principles of English law”.
  • On 17 May it amended its guidance accordingly.

The position depends on the terms of the depositary receipt programme concerned. For ADR programmes like that in the HSBC case, HMRC will effectively treat ADRs and the underlying shares as the same asset for most purposes.

Of course, few UK taxpayers will hold ADRs in UK companies rather than the underlying shares. It is quite possible, however, that any such UK-taxpaying ADR holders are not domiciled in the UK. A “nondom” selling non-UK assets may opt for the remittance basis of taxation, and only pay tax on a gain if the proceeds are brought in (“remitted”) to the UK. HMRC’s old guidance instructed officials to resist any

claims that a gain on selling depositary receipts could benefit from the remittance basis (save in exceptional circumstances where the value of the DR was not simply derived from the underlying shares). This statement has been lost in the revision process, but it must still reflect HMRC’s view. If HMRC had been prepared to accept that ADRs were not interests in the shares themselves, however, it would have followed that the remittance basis could apply: this might have allowed non-doms to defer or escape tax by investing in ADRs rather than the shares.


If an ADR holder is not the beneficial owner of the underlying shares, the possible ramifications go beyond capital gains tax. Here are three.

  • Whether a foreign depositary receipt over UK shares is a UK asset is also important for inheritance tax purposes. The estate of a non-dom is not subject to inheritance tax on non-UK assets. So if an ADR were not an interest in UK shares, it could escape inheritance tax. (At present HMRC’s guidance is coy on whether ADRs are UK assets: questions on this must be referred to HMRC’s Technical team.)
  • Whether depositary receipts can be held in some types of employee share scheme depends on whether they are to be treated as shares. (Again, it would be surprising if many UK employees held shares in their UK employer in ADR form.)
  • Finally, the nature of the payments received by the ADR holder would be affected: the holder would receive not dividends, but manufactured dividends. In practice, however, this would be unlikely to make a difference in the UK.


HMRC has taken a pragmatic approach. Treating the ADRs as giving beneficial ownership of the underlying shares aligns the tax treatment of the two, and is consistent with the views of many practitioners and HMRC’s previous practice. On the other hand, it does raise the question of consistency. It is admittedly difficult to hold HMRC to a position on the basis of its guidance – as witness the recent Gaines-Cooper litigation.3 But here HMRC argued against its own practice, won the point, and is now happy to carry on as if nothing had happened. In a taxpayer that might be thought aggressive.