Regulatory Capital Requirements: UK Tax Treatment of New Regulatory Capital Instruments

Sullivan & Cromwell LLP - 10 July 2012

HM Revenue and Customs have published a note setting out how they view the tax treatment of regulatory capital instruments intended to comply with the new Basel III regime and the EU’s CRD IV and Solvency II regimes. According to HMRC, the interest payable on instruments qualifying as Additional Tier 1 under the new regime would not be deductible for UK tax purposes. Interest on new Tier 2 instruments may be deductible until the new regime comes into force, but after that it would not be.

Importantly, the note only considers the treatment under current law: HM Treasury will be consulting on a new tax regime for these instruments. UK institutions will hope the new rules are more generous.