STSM021245 - Scope of stamp duty on shares: stamp duty: basics of a charge: transfer of Hybrid Capital Instruments

Hybrid Capital Instruments: what is a hybrid capital instrument?

Hybrid capital is a form of capital that combines characteristics of bonds and equities.

Hybrid capital instruments differ from normal debt instruments in that they contain some limited equity-like features.

Hybrid capital instruments may include a right for the issuer to cancel or defer interest payments and/or the instrument may contain terms that allow the principal to be released or converted into shares in certain circumstances.

Who issues hybrid capital instruments?

Banks and insurance companies are required to hold a certain amount of regulatory capital. This capital usually includes a mixture of share capital and debt funding. The regulations covering this regulatory capital require that debt instruments issued to raise this capital must have features that allow the bank or insurer to continue operating in the event of the bank or insurer coming under financial strain and having depleted levels of capital. This means the principal on some debt instruments issued by banks and insurers (or their parent companies) can be written down or converted to equity in certain circumstances. For some types of capital the issuer must also have the right to cancel or defer interest payments.

Hybrid capital is issued by some companies outside the regulated financial sector to protect their credit rating. These are most commonly issued by companies in the utilities and communications sector to support long term capital investment projects.

Hybrid capital instruments: Election

The hybrid capital instruments rules (section 475C Corporation Tax Act 2009 (CTA09)) require the issuer to make an irrevocable election into the new rules for each instrument within six months of issue.

For instruments in existence before 1 January 2019 the election should be made on or before 30 September 2019. This deadline will normally be before the company has received a notice to file a Corporation Tax (CT) return, so therefore the election will normally be made under Schedule 1A Taxes Management Act 1970 outside the CT return, rather than under paragraphs 57 or 58 of Schedule 18 Finance Act 1998.

Where a group or company has a Customer Compliance Manager (CCM) it should send the election to the CCM. In all other cases the election should be sent to the following mailbox: hybrid.loanrelationshipelection@hmrc.gov.uk

The election should include:

  • the name of the entity making the election
  • details of the instrument (a copy of the term sheet will suffice)
  • the date of issue of the instrument
  • a declaration to the effect that all the particulars given are correctly stated to the best of the information and belief of the person making the election

Date of issue - there is nothing to stop the debtor making an election prior to, or at the date of issue of the instrument

Declaration - the company will not have received a notice to file at the point it is required to make the election therefore this can only be made outside the CT return under Schedule 1A TMA70.

The election is ineffective where there are arrangements with a main purpose of obtaining a tax advantage for any person.

Alternative deadlines for elections

Alternative deadlines for making an election into the new rules apply in the following two circumstances:

  • Where a loan relationship is only able to qualify as a hybrid capital instrument due to the amendment made to the definition of a hybrid capital instrument in SI 2019/1250 (The Taxation of Hybrid Capital Instruments (Amendment of Section 475C of the Corporation Tax Act 2009) Regulations 2019). In this circumstance, the deadline is six months from 4 November 2019, which is the date that SI 2019/1250 came into force.
  • Where the terms of the loan relationship are themselves amended so that it will be able to qualify as a hybrid capital instrument. In this circumstance, the deadline is six months from the beginning of the accounting period following the accounting period in which the amendment was made.

In the second circumstance, the earliest point at which the loan relationship will be able to qualify as a hybrid capital instrument is the first day of the accounting period following the accounting period in which the amendment was made. This is because the definition of a hybrid capital instrument refers to the features of a loan relationship “for an accounting period of the debtor”. If the loan relationship does not meet the definition for any part of the debtor’s accounting period, it will not be able to qualify as a hybrid capital instrument in that accounting period.