This article is produced by our London Tax team, which is part of our global Tax practice. Our series, "Understanding Tax", explores commercially relevant and recent changes to the UK's tax code.
Many readers will be all too familiar with the tax pitfalls which can arise from issuing or holding debt instruments which exhibit "equity like" features. Generally such instruments are treated as akin to equity from a tax perspective, with the result that distributions are generally not tax deductible and corporate tax groups can be broken due to the tax status of the holders.
The issues noted above were particularly relevant to banks and insurance companies which were issuing certain types of regulatory capital. As a result, in 2014 the UK introduced a specific tax regime which, in practice, sought to ensure that certain instruments (being Tier I and Tier II regulatory capital) issued by such banks and insurance companies continued to be treated as debt for UK tax purposes (the RCS regime). Whilst the RCS regime was welcomed by the banking and insurance industry it had no application to companies or groups operating outside of these regulated industries.
A transfer of a hybrid capital instrument falling within the HCI regime is exempt from all UK stamp duties.