STSM021247 | Scope of stamp duty on shares: stamp duty: basics of a charge: Securitisation and insurance-linked securities (ILS)

What are securitisation and insurance-linked securities (ILS)

Securitisation

Securitisation is a widely used method of raising debt finance on the capital markets through the issue of asset-backed securities. It can also aid capital, liquidity and risk management. In typical securitisations, income-producing assets (for example loans) are used as collateral backing for the issue of securities by a special purpose vehicle (the note-issuing SPV). As part of the process the assets are usually transferred directly or indirectly by the original creator of the assets (for example the lender), the originator, to the note-issuing SPV which uses the proceeds of the issue of securities to purchase the assets.

A specific corporation tax regime applies to securitisation companies, the Taxation of Securitisation Companies Regulations 2006, known as the TSCR. The TSCR introduced new tax rules with effect from accounting periods beginning on or after 1 January 2007 for securitisation companies involved in the securitisation of financial assets. Such companies are taxed on their ‘retained profit’ (the amount they retain from their participation in the transaction) rather than the profit or loss shown in their statutory accounts.

See CFM72000+ for more information on securitisation.

ILS

ILS are a form of risk mitigation for insurance and reinsurance companies. They offer a means of transferring insurance risk to capital market investors. Arrangements will typically involve an insurer or reinsurer transferring specific risks to an insurance SPV known as a qualifying transformer vehicle. The qualifying transformer vehicle will then issue notes to investors to raise sufficient capital to cover the transferred insurance risk.

A specific corporation tax and income tax regime applies to ILS, the Risk Transformation (Tax) Regulations 2017 (SI 2017/1271).

See GIM8261+ for more information on ILS.

Stamp Duty and Stamp Duty Reserve Tax (SDRT)

Section 68 of the Finance Act 2022 allows HM Treasury to make regulations to provide that Stamp Duty or SDRT is not chargeable on transfers of securities issued or raised by a securitisation company or a qualifying transformer vehicle. It also allows HM Treasury to make regulations to provide that Stamp Duty or SDRT is not chargeable on transfers of securities to or by a securitisation company.

A Stamp Duty and SDRT exemption pursuant to these powers came into force on 17 May 2022 in The Securitisation Companies and Qualifying Transformer Vehicles (Exemption from Stamp Duties) Regulations 2022 (SI 2022/464). This provides an exemption from Stamp Duty and SDRT on the transfer of capital market investments issued as part of capital market arrangements by qualifying transformer vehicles and note-issuing securitisation companies.

See STSM041067 for more information.