CFM37860 - Loan relationships: hybrid capital instruments: transitional provisions

FA19/Sch20/Paras10-15

The following transitional rules apply for loan relationships that were regulatory capital securities (RCS) for the purposes of the RCS Regulations 2013 immediately before 1 January 2019:

RCS instruments issued by insurers

Companies that have issued instruments which qualify as Tier 1 or Tier 2 instruments under Commission Delegated Regulation 2015/35 do not have to bring into account any debits or credits arising from those loan relationships being converted into shares or subject to write-down (whether permanent or otherwise) before 1 July 2019.

Fair valued RCS instruments

Instruments accounted for at fair value or having an embedded derivative which qualified as RCS instruments will continue to be taxed as a single loan relationship at amortised cost through to 31 December 2023.

An adjustment may be needed at the end of this transitional period to bring into account any difference between the tax-adjusted carrying value of the instrument at the end of an accounting period ended on 31 December 2023 and the tax adjusted carrying value of that instrument at the beginning of the 2024 period.

If a company has an accounting period that straddles the end of the transitional period, this is to be split into two separate deemed accounting periods - one ending on 31 December 2023 and one starting on 1 January 2024.

Where there is a transitional adjustment, this is calculated and brought into account under section 352B and there is nothing to be brought into account under CTA09/S316 or under the Change of Accounting Practice (COAP) Regulations. Where an instrument subsequently comes into or falls out of s352B, then s316 could apply to pick up a transitional amount. However, this would not arise from a change in accounting policy and so would not fall within the COAP Regulations.

Withholding tax

The exception from the duty to deduct income tax under sections 874 and 889 Income Tax Act (ITA) 2007 is maintained for instruments that qualified as RCS for interest payments made before 1 January 2024.