Securitisation Rule Changes: Treasury Impact Explained
Published: June 06, 2022
The rules related to the taxation of securitisation vehicles in the UK are changing. What will be the impact on UK-based corporations and in particular, their access to capital markets and raising debt? Lawyer, Christy Wilson, Associate, Katten UK, explains.
The UK Government is in the midst of making changes to the securitisation of the country’s taxation regime. During 2021, it launched a consultation in relation to the taxation of securitisation vehicles in the UK. Many topics were raised during that exercise , some of which resulted in regulatory changes during May this year.
The main motive for the review and amendment to the securitisation regime is so that the UK can ensure that it remains a competitive location for international investment. Especially following Brexit, the UK needs to guarantee that its financial regimes remain attractive to investors. Typically, countries such as Luxembourg and Ireland have been more attractive as their securitisation regimes have been less complicated than the UK’s.
On the 25 April 2022, regulations were introduced bringing about some of the government proposals that were explored in the 2021 consultation. These regulations came into effect on 17 May 2022.
Threshold
The regulations (Statutory Instrument 2022/465) (the 465 Regulations) have implemented a 50% reduction in the note-issuing threshold (from £10m to £5m). This decrease in threshold is material, the intention being to make the UK securitisation regime more inclusive.
The 2021 consultation specifically mentioned that the securitisation regime should be open to a more diverse array of organisations, including charities. It will be interesting to see which companies and organisations do take advantage of this decrease in threshold and how it impacts their investment strategy, particularly in the charity sector.
Another reason for the decrease in threshold was due to the fact that it was difficult to recycle the note-issuing company for multiple issuances as there was a requirement that each single issuance should be in excess of £10m. For instance, the note-issuing company could not make a £13m issuance under one capital market arrangement, and then later in the same accounting period make a £7m issuance under a separate capital market arrangement. Now, with the threshold change, multiple issuances should be easier.
Retained securitisations
Another point that was raised in the 2021 consultation was to make the legislation around ‘retained securitisations’ clearer, specifically in relation to the definition of ‘control’. One of the conditions under the definition of a ‘securitisation company’ is that the third party to which or to whom the securities are issued must not be a connected party.
In order to determine whether a party is connected, it is necessary to know by whom it is controlled. The 465 Regulations now confirm that the definition of ‘control’ to be used in this context is the definition found in s1124 (2) of the Corporation Tax Act 2010. The impact of this change is that a note-issuing company should only be connected with persons controlling it through holding shares, voting powers, rights conferred by articles of association or shareholder agreements.
Stamp duty loan capital exemption
Stamp duty is a charge on instruments that transfer the beneficial interest in stock or marketable securities. The government was aware that there was uncertainty around the application of the stamp duty loan capital exemption and this was a barrier to establishing securitisations in the UK.
The uncertainty centred on provisions in legislation that deny the exemption when returns are related to the profits of the business or carry a right to an excess rate of return or repayment. Therefore, a new exemption from all stamp duties on the transfer of capital market investments issued as part of a capital market arrangement by transformer vehicles and also securitisation companies has been introduced via new regulation (Statutory Instrument 2022/464).
As expressed in the 2021 consultation, the government intends that this stamp duty exemption will not require any workarounds, as were previously often needed. These are complicated and contribute to the overall costs of the securitisation process, in particular costly legal opinions confirming the stamp taxes position.
These recent changes may be an indication that there are more to come. Whatever amendments the government makes to taxation of the securitisation regime, the government needs to ensure that it does not jeopardise the certainty and predictability of the UK tax system. There is a constant tussle between ensuring that the UK is an attractive investment centre, while safeguarding against taxation gaps and loopholes that can be exploited and contribute to a decrease in tax revenues.