UK Gov prepares way to eliminate Stamp Duty taxes for ILS

The UK Government’s HM Revenue & Customs (HMRC) is preparing the way to eliminate the need to pay any Stamp Duty related taxes for insurance-linked securities (ILS) transactions or on reinsurance transformers established in the country, which is a key step to make transacting ILS more competitive in the United Kingdom.

Back in March, the UK Government launched a 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 can be used for entering into transactions such as catastrophe bonds and collateralised reinsurance arrangements.

The Government’s HMRC has published a statement this morning explaining that it aims to give secondary legislative powers so that HM Treasury can effect Stamp Duty and Stamp Duty Reserve Tax (SDRT) changes in relation to securitisation and insurance-linked securities (ILS) arrangements.

Effectively, with the Government keen to ensure Stamp Duty related taxes don’t make its financial services less competitive, but any changes thought better made by secondary legislation, rather than primary, this move will give the Treasury the power to eliminate Stamp Duty related taxes for ILS vehicles and reinsurance transformers domiciled in the UK under the Risk Transformation Regulations.

Which will serve to solve this area of the competitiveness problem, removing what has been seen as one of the blockers that have prevented greater uptake of and use of ILS structures in the United Kingdom.

“Technical changes to allow UK securitisation and ILS arrangements to operate more effectively, for example by reducing cost and complexity, may be more appropriately made by secondary legislation than by primary legislation. This measure will increase the flexibility of the government in responding to the evolving nature of the securitisation and ILS markets,” the Government’s policy paper published today explains.

As a result, legislation will now be introduced in the UK Government’s Finance Bill 2021-22 providing powers to make Stamp Duty and SDRT changes relating to securitisations and ILS by secondary legislation.

“It will allow HM Treasury to make regulations to provide that Stamp Duty or SDRT is not chargeable on transfers of securities issued or raised by a securitisation company or a qualifying transformer vehicle. It will also allow HM Treasury to make regulations to provide that Stamp Duty or SDRT is not chargeable on transfers of securities to or by a securitisation company,” the paper further explains.

This move will help to keep the UK’s ILS regulatory regime more competitive, but it will still face stiff competition in terms of speed to market, regulatory oversight and burden, possibly also in other areas of taxation that haven’t been as well clarified too.

But it’s a significant step towards another move that will make the UK ILS issuance playing field more level with other domiciles, so a positive for the UK Government’s ambitions to attract more insurance-linked securities (ILS) business to its shores, so could stimulate more UK catastrophe bond and collateralised reinsurance activity in time.

However, it remains important to note, that, as we said before, a small change to tax like this, while serving to make the UK’s ILS regime more attractive, won’t drive significant issuance immediately, especially while ILS transactions can be entered into so swiftly in locations like Bermuda, plus while cost-savings are available from Singapore’s ILS grant scheme and the Hong Kong ILS grant.