Government consultation on a new regulatory and tax regime for Insurance Linked Securities (“ILS”)

Wed 23 Nov 2016

Insurance Linked Securities are securities issued to investors, the value of which is linked to an insured event. These are most commonly used for major natural disasters and one of the most common types have been known as Catastrophe Bonds, or CAT-bonds. The Government has issued a consultation and draft regulations on the regulatory and tax aspects framework relating to ILS.

Where a company insures against an event, often a natural disaster, the insurance company may transfer the risk to a Special Purpose Vehicle (“SPV”). The SPV issues insurance linked securities (ILS) to investors and invests in appropriate investments. This gives the cedant company a benefit under the Solvency II capital requirements.

The consultation on the regulatory regime would allow the SPV to set up sub funds, known as protected cell companies, each of which would have its own investors, investments and risks. Each protected cell company could issue equity or bond instruments as appropriate to the underlying risk. This arrangement would comply with the Solvency II requirements on segregation of risk.

The tax consultation seeks views on the Government’s aim to tax the investor as if the investor had invested directly into the underlying investments. Each protected cell would be exempt from corporation tax, and there would be no withholding tax on dividends or interest payments made to investors, including those not resident in the UK. UK investors would be subject to tax according to their personal circumstances.

Anti-avoidance legislation has been proposed to ensure that the proposed tax regime would only apply where there has been genuine transfer of insurance risk to the SPV.

For more information contact Stephen Brown (Stephen.j.brown@mazars.co.uk) Paul Clement (paul.clement@mazars.co.uk) or Ian Thomson (ian.thomson@mazars.co.uk)