The measure
The Government is amending rules relating to group relief so that financial institutions that raise tier 1 capital through issuing preference shares via a subsidiary do not lose the ability to form a group for tax purposes. The measure was originally announced in December 2008 and has already been followed up with draft legislation which was published on the 9 March.
Banks commonly raise capital by issuing preference shares to investors. To ensure the shares qualify as tier 1 capital their terms will often allow the bank to reduce or withhold dividend payments in times of financial stress. In addition, the dividend rate may step up after a certain period if the shares are not redeemed.
Current rules on group relief mean that preference shares with these types of features count as equity for group relief purposes (since the dividend rate is not entirely fixed). This means that a subsidiary of a banking group issuing preference shares may not be within the tax group even though the preference shares are issued on ordinary market terms.
As previously announced, the Government is amending the group relief rules so that banks issuing preference shares on terms designed to ensure they count as tier 1 capital are able to form a tax group. This is being achieved by excluding the holders of these preference shares from the test which determines whether a company has sufficient entitlement to profits or assets available for distribution of another company to form a tax group.
Who will be affected?
Banks and other regulated financial institutions that issue preference shares to investors.
When?
The changes apply to all accounting periods that commenced on or after 1 January 2008 unless an election is made to retain the existing treatment of shares issued before 18 December 2008.
Our view
This is a welcome amendment that will give banks increased flexibility to issue regulatory capital in the form of preference shares without risk of breaking the tax group.
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