For the second time the UK government budget has included a measure related to the insurance-linked securities (ILS) market. With the UK’s efforts to establish itself as an ILS friendly domicile underway, the government today outlined how it hopes they will be treated from a tax perspective.
In the 2015 budget a year ago the UK government began its mission to lay down the rules necessary to bring ILS business to its shores, as it seeks to make London a competitive hub for doing ILS business. In this years 2016 budget the mention of ILS was minimal and solely related to the tax treatment of ILS.
In the ongoing consultation on ILS, which accelerated a few weeks ago with the release of a consultation document detailing guidelines and a proposed regulatory framework for a catastrophe bond and insurance or reinsurance linked securities (ILS) market to be established in the UK, tax is a key issue.
The UK proposals aim to match tax levels seen in other ILS and reinsurance domiciles, a difficult task given the efficiency of certain existing domiciles regulatory and tax environments. The tax question is also a tricky one, as the UK government does not want to be seen to be providing tax benefits to ‘big finance’ at a time when this is a difficult subject given voters concerns over tax avoidance.
So the tax issue comes down to where tax is paid, by who, whether it will be efficient for sponsors and whether it will be efficient for ILS investors, who will be largely offshore, to place their capital into UK ILS vehicles.
Today’s budget revealed that the government intends for regulations to be set which will allow for the taxation of ILS at the level of issuers and investors, which could get around the potential for withholding tax issues to make the UK’s ILS offering less competitive.
Finance Bill 2016 will include language to regulate the tax treatment of ILS in this way, which has been cited as one of the important issues to be resolved as taxation at the vehicle level would be unlikely to result in as efficient a way for investors to participate in a UK ILS issuance.
Law firms, accountants, ILS investors and ILS managers have all been saying since the start of the UK’s push for ILS business that getting the tax treatment right would be key and this appears to be the sign that the government has listened to market feedback and intends to do what it can.
There is still no guarantee that the UK can be as tax efficient as other ILS domiciles, but targeting tax at the issuer and investor level will give it the best chance of being so.
Of course the other potential hurdle, of just how fast the UK could get new ILS structures set up and ready to be used, is the other big question, as so many other domiciles can now enable an ILS transaction structure to be registered, set up and executed in a matter of just a few weeks.
The proposal should allow the insurance SPV to be free of corporation tax, which has been a key part of the government’s proposal, while investors and issuers are taxed on profits or withdrawal. That enables the UK to be as competitive as it possibly can on tax, while still ensuring investors and issuers are subject to tax on ILS vehicles.
How exactly this gets written up in Finance Bill 2016 remains to be seen. The wording from today’s budget is below and we’ll update you as and when any further details become available.
Insurance Linked Securities – The government is consulting on proposals for a new, competitive framework for Insurance Linked Securities (ILS) business, including the supervision, corporate structure and taxation of ILS vehicles. The Bank of England and Financial Services Bill, which is currently before Parliament, contains a power to make regulations which will facilitate ILS business. Finance Bill 2016 will include a power to make regulations for the tax treatment of ILS at the level of issuers and the investor. The government will then consult on new regulations, which will be nalised by the end of 2016. (Finance Bill 2016)
The proposal for this ILS tax legislation reads:
The legislation will allow regulations to determine the vehicles to which the rules will apply, the treatment of such vehicles, the conditions that must be satisfied to achieve that treatment, reporting requirements, the tax treatment of payments to investors in such vehicles and anti-avoidance provisions.
Detailed regulations made under this power will be developed in consultation with stakeholders following publication of the primary legislation and conclusion of the consultation on general proposals which began on 1 March 2016.