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Tier 2 Regulatory Capital

Volume 551: debated on Friday 26 October 2012

The Government are today clarifying the tax treatment of banks’ tier 2 regulatory capital instruments for those already in issue and those which will be issued in the future to ensure compliance with regulatory capital requirements under the forthcoming capital requirements directive IV.

Tier 2 capital instruments may now need to include a reference to the fact that these instruments 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. Changes to existing tax legislation will ensure that the tax treatment of banks’ tier 2 capital instruments is unaffected by this requirement. This is consistent with the tax treatment provided in other countries.

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. 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.

Further details have today been published on HMRC’s website, together with a technical note detailing how this is intended to operate.