GIM8266 | Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): insurance linked securities: removal of special tax treatment (condition B)

The corporation and income tax advantages allowed by Regulations 4 and 5 of the Risk Transformation (Tax) Regulations 2017 are removed if Condition B (Regulation 8) is met.

Condition B is a targeted anti-abuse rule (TAAR) which withdraws the special tax treatment given to QTVs if it is reasonable to conclude that one of the main purposes of the insurance risk transformation, or of arrangements which the insurance risk transformation forms part of, is to secure a tax advantage for any person. A tax advantage is defined at CTA10/S1139 and ITTOIA05/S6A(6) in relation to UK taxes.

Where the condition is met the special tax treatment is withdrawn from when the insurance risk transformation which aims to secure a tax advantage is entered into. Unlike Condition A, for protected cell companies, the condition is applied at cell level only so, for example, if the condition is met by cell A then the special tax treatment is not switched off for cell B.

The TAAR considers the purpose of the risk transformation or arrangements which the transformation forms part of. The TAAR will apply, for example, where a risk is assumed by a QTV from an insurer (or reinsurer) and that insurer (or companies within the same group etc.) subscribes for securities in the QTV with a purpose of reducing profits chargeable to corporation tax.

However, the TAAR will not apply only because an investor has structured their arrangements to take advantage of the special tax treatment afforded to QTVs, even if the investor is in a low tax jurisdiction or if there is common ownership between the investor and parties whose risk is reinsured into the QTV.

Similarly, the TAAR will not apply where an insurer (or company in the same group) subscribes (either directly or through a collective investment scheme) for securities in a QTV which has assumed a risk from that insurer if that insurer or group member holds the securities only for one of the following purposes:

• in order to provide market confidence (including subscribing for securities on the same terms as offered to independent investors, to demonstrate alignment of interests in the outcome of the risks reinsured into the QTV),

• for regulatory purposes, or

• with the intention of transferring the securities to independent investors as soon as market conditions allow. (This would be the case even if market conditions did not allow subsequent transfer, although repeated instances of this would test this assumption.)

Where a special purpose vehicle is formed by investors for the purpose of accessing third-party insurance business that is reinsured by the QTV the TAAR will not apply.

Nevertheless, where any of the main purposes of the risk transformation or wider arrangements is tax avoidance, the TAAR will continue to apply in all circumstances.

As soon as it becomes apparent that this TAAR may apply to a particular transaction, or when a query is received in relation to the application of this TAAR, the HMRC officer considering the TAAR should contact the Financial Services Team in Business, Assets & International for advice prior to issuing any response on the point.