Tax regime for insurance linked securities
Published 23 November 2016
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Who is likely to be affected
Insurers and reinsurers seeking to transfer insurance risk to capital markets and investors in those markets.
General description of the measure
Insurance linked securities (ILS) are a means of transferring insurance risk to capital market investors. The measure prescribes the tax regime, in regulations, for vehicles issuing ILS.
Policy objective
The measure forms part of wider work to establish the UK as an attractive base for insurance special purpose vehicles (ISPV) issuing ILS. Attracting ILS business to the UK will maintain and develop the UK’s position as a major global hub for specialist insurance and reinsurance. A competitive and clear tax treatment is a key component of this work.
Background to the measure
At the March 2015 Budget, the government announced that it would work with industry and the UK’s regulators to develop a new competitive corporate structure and tax regime allowing ILS vehicles to be domiciled in the UK.
As part of this approach, section 183 of Finance Act 2016 introduced a power to allow the Treasury to make regulations to define the scope, conditions and treatment of vehicles issuing ILS.
On 1 March 2016 a public consultation was launched on the government’s approach to the authorisation and supervision, corporate structure and taxation of ILS vehicles in the UK.
These draft regulations are concerned with the taxation strand of that consultation. Separate regulations are also being published on the authorisation, supervision and corporate structure of ILS vehicles.
Detailed proposal
Operative date
Regulations will come into force on the date specified in the regulations.
Current law
The Taxation of Insurance Securitisation Companies Regulations 2007 (SI2007/3338) set out rules applicable to insurance securitisation companies.
Proposed revisions
Regulations made under the power provided in section 183 of Finance Act 2016 will establish a new tax regime for insurance linked securities vehicles. The regime will involve:
- exempting the reinsurance activity of ISPVs from Corporation Tax
- a complete withholding tax exemption for investors
- UK investors being taxed as normal according to their facts and circumstance
UK investors in ILS will be taxed as normal on their investment income and overseas investors taxed according to the regime in their home country. The regulations ensure that the tax treatment is closely regulated and will not be available unless the business is authorised to carry out ILS by the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA).
Summary of impacts
Exchequer impact (£m)
| 2016 to 2017 | 2017 to 2018 | 2018 to 2019 | 2019 to 2020 | 2020 to 2021 | 2021 to 2022 |
|---|---|---|---|---|---|
| - | nil | nil | nil | nil | nil |
This measure is not expected to have an Exchequer impact.
Economic impact
This measure is not expected to have any significant economic impacts.
Impact on individuals, households and families
The measure will impact on individuals that invest in ILS as they will be able to receive any interest payments from the ISPV without deduction of basic rate Income Tax although these payments will remain taxable.
The measure is not expected to impact on family formation, stability or breakdown.
Equalities impacts
This measure applies mainly to companies but will affect individual investors in ILS who are within the protected equality groups that tend to be represented amongst those with above average income. Individual investors will continue to be taxed as before on interest and distributions received from the vehicle issuing ILS but any interest payments will be made without deduction of tax in order to simplify the tax regime and make it internationally competitive.
Impact on business including civil society organisations
This measure is expected to have a negligible impact on businesses. This measure will facilitate the growth of the ILS market in the UK through the removal of obstacles to that growth and will affect a small number of businesses who will incur negligible one off costs to familiarise themselves with the new rules. It is not expected that there will be any on-going costs.
This measure is expected to have no impact on civil society organisations.
Operational impact (£m) (HM Revenue and Customs (HMRC) or other)
This measure is anticipated to have a negligible operational impact for HMRC.
Other impacts
Competition assessment: the changes are not expected to have a significant impact on competition.
Other impacts have been considered and none have been identified.
Monitoring and evaluation
The measure will be monitored through information collected from tax returns and communications with affected companies.
Further advice
If you have any questions about this change, please contact Darryl Wall on Telephone: 03000 585977 or email darryl.wall@hmrc.gsi.gov.uk.
Declaration
Jane Ellison MP, Financial Secretary to the Treasury has read this tax information and impact note and is satisfied that, given the available evidence, it represents a reasonable view of the likely costs, benefits and impacts of the measure.