The UK Government’s HM Revenue & Customs (HMRC) has now published draft legislation through which it aims to exempt insurance-linked securities (ILS) issuance and reinsurance transformer vehicle issued notes from any Stamp Duty taxes, to help encourage ILS activity in the United Kingdom.
Earlier this year, in March, the UK Government consulted 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’s Risk Transformation Regulations were launched in 2017 and 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 consultation found concerns over the application of Stamp Duty and Stamp Duty Reserve Tax (SDRT) against insurance-linked securities (ILS) arrangements, suggesting they could be an added cost and make sponsoring and issuing ILS or catastrophe bonds in the UK less attractive.
Activity in ILS in the UK under its Risk Transformation Regulations has been limited so far, with higher costs, regulatory sluggishness and complexity all seen as possible hindrances to developing a vibrant ILS market in the UK.
Hence, the UK Government’s HMRC then published a statement in October explaining that it aimed to give secondary legislative powers so that HM Treasury could effect Stamp Duty and Stamp Duty Reserve Tax (SDRT) changes in relation to securitisation and insurance-linked securities (ILS) arrangements.
The Government said it was keen to ensure Stamp Duty related taxes weren’t making its financial services less competitive so secondary legislation would give Treasury the power to eliminate Stamp Duty related taxes for ILS vehicles and reinsurance transformers domiciled in the UK under the Risk Transformation Regulations.
Now, the proposed legislation has been published and the UK Government’s HMRC explained that the The Securitisation Companies and Qualifying Transformer Vehicles (Exemption from Stamp Duties) Regulations 2022 would provide an exemption from Stamp Duty and Stamp Duty Reserve Tax (SDRT) for the transfer of certain types of loan notes issued as part of insurance-linked securities (ILS) arrangements.
Importantly, HMRC noted yesterday that, “By providing certainty that a charge to Stamp Duty or SDRT will not arise on the standard notes, this instrument will reduce the cost and complexity of securitisation and ILS arrangements and encourage their location in the United Kingdom.”
Adding on the new legislation that, “This instrument provides certainty that no Stamp Duty or SDRT charge will arise on the transfer of standard notes issued as part of securitisation or ILS arrangements.”
This should make issuing insurance-linked securities (ILS) easier and more cost-effective in the UK, which is vital if the countries ILS marketplace is to become more active and issuance to increase there.
At the moment, any ILS arrangement issued in the UK would need to be specially structured using alternative methods to preclude the need for any Stamp Duty or SDRT charges, which adds costs and complexity to undertaking ILS business in the UK.
Even HMRC muses that this, “May be a factor in arrangements being implemented outside the UK.”
It certainly is one of the factors that has slowed adoption of the ILS regulatory regime in the UK so far.
The consultation process elicited a number of responses from the ILS community, with a general agreement that this Stamp Duty tax exemption is required.
The consensus was that this move can help to, “Make the UK a more attractive place to base these arrangements,” HMRC said.
The legislation effectively says, “The transfer of a capital market investment issued as part of a capital market arrangement by… a qualifying transformer vehicle… is exempt from all stamp duties.”
Which should be good enough to provide the certainty that sponsors and investors in ILS arrangements need and have the desired effect of raising the competitiveness of the UK as a domicile for insurance-linked securities (ILS), such as catastrophe bonds and collateralised reinsurance arrangements.
These draft regulations are expected to come into force in the Spring of 2022, following a period for public comment.
This is an important step forwards for the UK’s ILS market ambitions, removing one key blocker that has been making structuring ILS more complex and less cost-effective there.
Speed to market remains an issue, with regulatory approval still far slower than other ILS domiciles and this is something the UK needs to look at, if it really wants to take a meaningful share of the global ILS market’s issuance.
But reducing costs and complexity should help to encourage some more activity there, particularly for sponsors and investors that want to transact in the UK, so this is seen as a positive step by the Government.
One small change to tax and removal of blocker is key and will serve to make the UK’s ILS regime more attractive.
But it is unlikely to drive significant issuance immediately, absent other changes to improve speed to market and lower cost further, at a time when ILS transactions can be entered into so swiftly in locations like Bermuda, or while significant cost-savings are available from Singapore’s ILS grant scheme and the Hong Kong ILS grant.
As we’ve said many times, every country with a regulated, functioning financial marketplace should really have the ability to host ILS structures and transactions and we expect, in future, to see many others offering regulatory and legislative solutions to help their local insurance and reinsurance industry access the capital markets.