STSM041067 - Exemptions and reliefs: exemptions: loan capital exemption – Securitisation and insurance-linked securities (ILS)

Exemption for the transfer of certain types of loan notes issued as part of securitisation and ILS arrangements

Section 79 of the Finance Act 1986 provides a general exemption from Stamp Duty (and therefore Stamp Duty Reserve Tax (SDRT) - see STSM041020)) for the transfer of loan capital. There are exceptions to this for loan capital which is in some way equity-related, for example by carrying a return linked to the profits of a business or by carrying a right to an excessive return either as interest or on repayment (see STSM021220 and STSM041060).

The standard loan notes issued as part of securitisation and ILS arrangements (see STSM021247) are known as ‘capital market investments’ and are issued as part of ‘capital market arrangements’ by the note-issuing securitisation special purpose vehicle (SPV) or qualifying transformer vehicle. These notes commonly have characteristics which make it unlikely or uncertain that the loan capital exemption will apply.

The Securitisation Companies and Qualifying Transformer Vehicles (Exemption from Stamp Duties) Regulations 2022 (SI 2022/464) provides an exemption from Stamp Duty and SDRT on the transfer of capital market investments issued as part of capital market arrangements by qualifying transformer vehicles and note-issuing securitisation companies.

For the purposes of Stamp Duty, the Regulations have effect in relation to instruments executed on or after 17 May 2022.

For the purposes of SDRT, the Regulations have effect—

  1. in relation to the charge to tax under section 87 FA1986, where—
  2. the agreement to transfer securities is conditional, and the condition is satisfied on or after 17 May 2022;
  3. the agreement to transfer securities is not conditional, and the agreement is made on or after 17 May 2022;
  4. in relation to the charge to tax under section 93 or 96 FA1986, where the transfer occurs on or after 17 May 2022.

If the transfer of a capital market investment is exempt under these provisions, the transfer or vesting of interests in or rights in respect of such loan capital is also exempt under section 50 FA1987.

“capital market arrangement” and “capital market investment” have the same meaning as in section 72B(1) of the Insolvency Act 1986 (see paragraphs 1, 2 and 3 of Schedule 2A to that Act).

“note-issuing company” has the same meaning as in regulation 5 of the Taxation of Securitisation Companies Regulations 2006 (SI 2006/3296).

Regulation 3 of the Risk Transformation (Tax) Regulations 2017 (SI 2017/1271) defines a qualifying transformer vehicle.

Exceptions to the exemption

There are exceptions to the exemption where the specific securitisation or ILS tax regime did not apply when the capital market arrangement was entered into or where notes carry certain conversion or acquisition rights.

Exception to the exemption where the specific securitisation or ILS tax regime did not apply at the time the capital market arrangement was entered into

In the case of capital market investments issued by note-issuing securitisation companies, the exemption does not apply if, at the time the capital market arrangement was entered into, regulation 14 (corporation tax charge) of SI 2006/3296 did not apply to the note-issuing company.

In the case of capital market investments issued by qualifying transformer vehicles, exemption does not apply if, at the time the capital market arrangement was entered into, regulation 6 (removal of special tax treatment) of SI 2017/1271 applied to the qualifying transformer vehicle.

Exception to the exemption where notes carry certain conversion or acquisition rights.

The exemption also does not apply to the transfer of a capital market investment issued as part of a capital market arrangement which carries a right (exercisable at any time) of conversion into other securities, or to the acquisition of other securities.

However, the exemption is not disapplied when the notes carry a right of conversion solely into, or to the acquisition of, securities which are themselves capital market investments issued as part of a capital market arrangement by the same qualifying transformer vehicle or note-issuing company.