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HMRC internal manual

Corporate Finance Manual

Other tax rules on corporate finance: securitisation: background


The Oxford English Dictionary (Compact Edition) defines ‘securitisation’ as ‘the conversion of an asset, especially a loan, into marketable securities, typically for raising cash.’ Securitisation is widely used because of the advantages it offers in terms of management of risk and raising funds.

This guidance is about securitisation arrangements using ‘Special Purpose Vehicles’ (SPVs).

Securitisation is essentially a method of raising debt finance. However, it can also aid management of capital requirements (for regulatory and balance sheet purposes) and risk.

It is a mechanism whereby assets (loans, receivables etc) are used as collateral backing for the issue of securities to third party investors. As part of the process the assets are transferred to a special purpose vehicle that is normally separated from the borrower and can thus obtain a better rating from credit rating agencies, than the borrower could.

CFM72020 onwards provides background information about securitisations and how companies involved in the process are taxed for accounting periods beginning before 1 January 2005. Guidance on the taxation of securitisation vehicles for accounting periods beginning on or after 1 January 2005 is at CFM72200 onwards.

Securitisation originated in the US. The first major UK securitisation was in 1987. The assets originally used were debt assets that generated a flow of income, such as mortgages. More recently a wide variety of assets have been used ranging from credit card receivables and rental streams to future income streams and whole business income streams such as income from pub chains and football stadiums.

Securitisation structures are quite complex, so they tend to be used to raise substantial amounts of finance. Banks and financial institutions regularly securitise loan and mortgage books with values in excess of £1bn (thus freeing up capital for further lending).

Securitisation is used as a method of funding for three main reasons:

  • it is an effective way of raising finance at a competitive rate that is generally less than traditional bank lending or bond issues;
  • it can help the originator to meet regulatory capital requirements, and thereby free up working capital for further core business;
  • and it improves the funding options of the borrower (diversification) - a securitisation enables an entity to benefit from capital market financing which it would otherwise not have access to because its overall credit rating is not strong enough.

The precise structure of a securitisation is determined by the relative importance of several factors: the specific commercial purpose of the securitisation, the relevant accountancy treatment, and the judgement and influence of industry regulators (who can be particularly demanding in the banking and insurance sectors) and credit ratings agencies. As securitisations are all about obtaining finance, the credit ratings of the deals are all important.

Securitisation deals are normally commercially driven, rather than tax driven. However, tax and its impact will be a consideration for credit rating purposes (and from the perspective of an originator expecting to receive profit extraction from the structure), and there are some tax compliance risks associated with these deals. The specific tax issues are covered in detail at CFM72100.