STSM021245A - Scope of stamp duty on shares: stamp duty: basics of a charge: exemption for transfers of Hybrid Capital Instruments
Exemption from Stamp Duty and Stamp Duty Reserve Tax (SDRT)
The hybrid capital instruments rules (Para 20 to Schedule 20 Finance Act 2019) provide an exemption from Stamp Duty and SDRT on the transfer of these instruments providing they fall within the meaning of section 475C Corporation Tax Act 2009 (CTA 09).
S. 475C(1) says:
‘For the purposes of this Part, a loan relationship is a “hybrid capital instrument” for an accounting period of the debtor if –
a) the loan relationship makes provision under which the debtor is entitled to defer or cancel a payment of interest under the loan relationship,
b) the loan relationship has no other significant equity features, and
c) the debtor has made an election respect of the loan relationship which has effect for the period.’
This therefore requires an election into the hybrid capital instruments rules to have been made.
If an election was not made before Stamp Duty or SDRT would have become chargeable, then unless the debtor can rely on other exemptions such as the loan capital exemption then stamp duties will be payable at the relevant date.
Some instruments that do not meet the definition of a hybrid capital instrument may defer interest payments by reference to a trigger within the instrument. As they do not meet the definition of a hybrid capital instrument they will therefore not qualify for exemption under the hybrid capital instruments rules.
However these instruments would not be excluded from the section 79 Finance Act 1986 loan capital exemption, as the exclusion at s.79(6) FA86 operates by reference to the amount of the interest, not the timing of it. Therefore if interest is deferrable (but not cancellable) this term alone would not jeopardise the separate loan capital exemption and such instruments would be exempt from Stamp Duty and SDRT.
Section 79(5) FA86 dis-applies the loan capital exemption at s.79(4) FA86 if at the time the instrument is executed it carries a right of conversion into shares or other securities. It is HM Revenue & Customs’ (HMRC) view that this right of conversion must be exercisable, either on issue or later, by the creditor/holder. Banks may issue instruments that either:
- do not carry conversion rights but could be required to convert under the Banking Act 2009 (or comparable non-UK acts),
- contain terms that acknowledge the power of the UK resolution authority (or comparable non-UK resolution authority) to direct a conversion of the instrument, or
- are required by the regulator of the issuer or issuer’s parent to include contractual bail-in conditions
In the first case conversion is a requirement of the Banking Act (or comparable non-UK resolution authority) rather than being a term of the instrument. HMRC therefore accept that such an instrument does not carry a right of conversion and this will not by itself stop the loan capital exemption from applying. In the latter cases the terms of the instrument provide for conversion in certain circumstances, but do not carry a right of conversion that is exercisable by the creditor. As such the term, by itself, also doesn’t stop the loan capital exemption from applying.
Similarly if a reduction in the amount of the debt (debt for these purposes includes accrued but unpaid interest) ,whether temporary or permanent, could be required under the Banking Act (or comparable non-UK legislation), including where this is detailed in a term of the instrument recognising the power of the UK resolution authority (or comparable non-UK resolution authority) to direct such a reduction, HMRC also accepts that, by itself, this would not fall within the s. 79(6)(b) FA86 exclusion and cause the instrument to lose the loan capital exemption.