Monday, 23 July 2018

UK consults to provide insurance Tier 1 tax clarity

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The UK’s tax authority has launched a consultation to provide certainty around the tax treatment of new types of insurance capital.

The government said as part of the 2014 Budget that it would make regulations to ensure that insurers’ Solvency II instruments, that are issued in the form of debt, are taxed as debt instruments.

“The UK regulators, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) are changing their rules to transpose some of the articles and harmonise with the Directive. These regulatory changes give rise to uncertainty of tax treatment for Solvency II compliant restricted Tier 1 capital instruments that insurers may need to issue,” HM Revenue and Customs said.

HMRC is therefore proposing to amend the Regulatory Capital Securities Regulations 2013 to include these instruments.

Solvency II, which comes into play from January 2016, will require insurers to hold new types of regulatory capital designed to boost loss absorbency and improve financial stability. It has published the draft regulations, together with a draft explanatory memorandum. The consultation period will close on September 9.

The amendment essentially puts insurers on the same footing as banks for AT1 capital, said Tom Grant, a partner at Allen & Overy.

“As we’ve seen for AT1 issued by banks it has been important to ensure the tax regime in the relevant jurisdiction is suitable for instruments with the loss absorbency features of AT1 to be issued. This change will remove one important obstacle to UK insurers issuing Solvency II compliant AT1s with effect from the Solvency II implementation date,” he said.    

The new rules would apply to instruments issued during accounting periods commencing on or after January 1 2016. Most market participants expect the first Tier 1 bond to be issued after this date.

 “It’s a helpful development from a tax perspective for the UK insurers. The real test will be around how insurers demonstrate the stability of the SCR (Solvency Capital Requirement) relative to where they expect to operate under Solvency II,” said Veenay Chheda, a director in RBS’ hybrid capital and liability management team.

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