24/03/21

UK: Government launches tax consultation to make ILS rules more competitive.

As published on artemis.bm, Tuesday 23 March, 2021.

The UK Government’s HM Revenue & Customs (HMRC) has launched a new consultation on the tax treatment of insurance-linked securities (ILS) in a bid to enhance the competitiveness of the UK ILS regulatory and tax regime.

The UK introduced its insurance-linked securities (ILS) regime in 2017, the UK’s Risk Transformation Regulations, which govern ILS issuances and the necessary insurance special purpose vehicles (iSPV’s) that are used for entering into transactions such as catastrophe bonds and collateralised reinsurance arrangements.

HMRC is looking to remove a specific area of ambiguity around the tax treatment of ILS structures and issuances for investors and sponsors, so has launched a new consultation and is asking for feedback from market participants.

The consultation sees the Government seeking feedback on “the taxation of securitisation companies and on the Stamp Duty loan capital exemption as it applies to securitisations and to insurance-linked securities,” the documentation states.

The consultation should be of particular interest to taxpayers, investors, advisers and tax professionals concerned with insurance-linked securities.

Through this feedback process, the UK Government hopes to be able to add clarification and to update elements of the rules that determine the taxation of transactions involving insurance-linked securities, it explains.

It believes that this reform of the rules and clarification of tax treatment can ultimately enhance the competitiveness of the UK financial sector.

HMRC explains that “certain features in notes issued by ISPVs create uncertainty around their eligibility for the Stamp Duty loan capital exemption.”

It then asks those engaging with the consultation, “What are the characteristics of notes issued by ISPVs which create uncertainty as to whether the loan capital exemption applies to their transfer? How and to what extent does uncertainty related to the applicability of the loan capital exemption to transfers of such notes impact commercially on ILS arrangements?”

Then enquiring how the Government could best address any uncertainty related to this tax treatment and whether updated guidance from HMRC will be sufficient to erase it.

The consultation document further explains that the uncertainty around whether the loan capital exemption applies on transfer of ILS notes is adding complexity as well as cost and could also be a factor in ILS transactions being implemented outside the UK.

“The government would like to explore these, to ensure that the UK’s tax code keeps pace with the evolving nature of the capital markets, and contributes to maintaining the UK’s position as a leading financial services centre,” HMRC explained.

Removing any ambiguity around the tax treatment of ILS or catastrophe bond issuances can only help to make the UK’s ILS regime more competitive, as ambiguity often means increased cost and effort for those involved in a transaction.

However, the UK’s ILS regime faces stiff competition, in terms of the speed of getting a deal to market, as well as on cost at this time.

So, a small change like this, while making the UK’s ILS regime potentially more attractive, is unlikely to drive significant issuance immediately, especially while ILS deals can be entered into so swiftly in locations like Bermuda and while cost-savings can be made from Singapore’s ILS grant scheme and the soon to be available Hong Kong ILS grant.