Regulatory Capital Requirements: UK Sets Out Proposed Tax Treatment of New Additional Tier 1 and New Tier 2 Regulatory Capital Instruments

Sullivan & Cromwell LLP - 9 August 2013

HM Revenue and Customs have published draft regulations (the “Draft Regulations”) on the tax treatment of Additional Tier 1 and Tier 2 regulatory capital securities issued by UK financial institutions to reinforce their regulatory capital base.

While significant amendments to the current Draft Regulations are expected, the long-anticipated Draft Regulations are a welcome indication of HMRC’s position on the taxation of new regulatory capital instruments, and of their willingness to create a benign corporate tax environment for issuing such instruments.

The most important features are

  • coupons payable in respect of such regulatory capital securities (but not dividends on share capital) will be deductible as interest; 
  • income tax will not be required to be withheld from payments on regulatory capital securities;
  • transfers of regulatory capital securities will be exempt from stamp duties; and
  • no tax will be crystallised for issuers as a result of the writing-down or writing-up of regulatory capital securities.