“Hybrid Capital Instruments” – the Proposed New UK Tax Regime and its Impact on Loss-Absorbing Debt

February 8, 2019

The UK government announced its intention to repeal legislation granting favourable tax treatment to certain Tier 1 and Tier 2 regulatory capital in its Autumn Budget 2018. In a move which appears designed to address state aid concerns, a new regime for “hybrid capital instruments” has instead been proposed for application beyond just banks and insurance companies.

However, in other respects, the new regime is much more narrowly targeted than the previous one.  In particular:

  • the category of instruments to which the new regime applies is narrower and is no longer directly linked to the instruments’ characterisation for regulatory capitalpurposes; and
  • fewer benefits apply automatically to instruments which qualify.

The government has also chosen generally not to legislate to address the tax treatment of instruments issued by banks, building societies and investment firms to comply with the Bank of England’s statement of policy on implementation of EU minimum requirements for own funds and eligible liabilities (MREL), which took effect on 1 January 2019 for global systemically important banks operating in the UK. The treatment of those instruments will instead be principally addressed through new technical guidance from HM Revenue & Customs.

The new regime introduces some uncertainty, as many issuers will have to look to general existing law (interpreted in light of the HMRC guidance), to determine the tax treatment of their regulatory capital and MREL.