Reuters: Bankruptcy News: UK Tier 2 gets HMRC tax boost

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UK Tier 2 gets HMRC tax boost Oct 26th 2012, 15:58 By Helene Durand Fri Oct 26, 2012 11:58am EDT LONDON, Oct 26 (IFR) - UK banks' use of subordinated debt was given a boost on Friday after the Financial Secretary to the Treasury Greg Clark said existing and future Tier 2 instruments would be tax-deductible. The news will likely be greeted with relief by banks who have refrained from issuing this type of debt in recent months for fear that it would fall foul of the tax man. Tax-deductibility is one of the most important considerations that borrowers take into account when looking at issuing debt instruments as it inherently makes debt a more attractive financing option. A release by the HMRC in June after a long consultation with the industry shed little light on bank capital instrument tax treatment and many practitioners frustrated. However, in a written statement, Clark said future Tier 2, and instruments already in issue would be tax-deductible to be consistent with the tax treatment provided in other countries. New regulations governing Tier 2 instruments will include language that they may be subject to a regulatory requirement to be either written down or converted to share capital at the point at which a bank nears insolvency. Clark said changes to existing tax legislation would ensure that the tax treatment of banks' Tier 2 capital instruments would be unaffected by this requirement. "This clarification will ensure that the coupon on Tier 2 capital which is already in issue or yet to be issued will be deductible for the purposes of a bank computing its profits for corporation tax purposes," he said. "This will provide banks and investors with the certainty they need regarding the issuance of new Tier 2 capital instruments that banks need to issue now and in the future to replace existing instruments as they reach their maturity date and to meet their regulatory requirements." Market participants now hope this interpretation could also apply to Tier 1 instruments. "No statement on or reference to Tier 1 instruments has been made but we are of the view that the read-across is positive mainly because of the rationale quoted by the UK Government (international competitiveness) which would, to a lesser extent, also apply to Tier 1," Nomura wrote in a note on Friday. (Reporting by Helene Durand; editing by Alex Chambers) Link this Share this Digg this Email Reprints

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