CFM37830 – Corporate Finance Manual – HMRC Internal Manual


The hybrid capital instrument rules apply to loan relationships that fall under a bespoke definition of hybrid capital instrument for tax purposes – see CFM37840.

This section of the guidelines provides a general description of the hybrid capital business context.

Hybrid capital is a form of capital that combines the characteristics of bonds and stocks. There is a wide variety of hybrid capital instruments, but the new tax rules only apply to instruments that, despite having limited equity-like features, are in substance debt.

Hybrid capital differs from normal debt instruments in that it contains certain limited equity-like features.

Corporation tax rules allow companies to deduct interest expense (and other borrowing costs) in determining taxable profits, but not to deduct profit distributions to shareholders.

Hybrid capital may include a right for the issuer to cancel or defer interest payments and/or the instrument may contain terms to release principal or convert it to equity under certain circumstances.

These features may lead to uncertainty as to whether payments under the hybrid capital instrument should be netted as interest or treated as profit distributions.

Who issues hybrid capital?

Banks and insurance companies are required to hold a certain amount of regulatory capital. This capital typically includes a mix of equity and debt financing. The regulations relating to this regulatory capital require that the debt securities issued to raise these funds have characteristics allowing the bank or the insurer to continue to operate in the event of financial stress and depletion of the bank’s capital. or the insurer. This means that the principal of certain debt securities issued by banks and insurers (or their parent companies) may be written down or converted into equity under certain circumstances. For certain types of capital, the issuer must also have the right to cancel or defer the payment of interest.

Hybrid capital is also issued by some companies outside the regulated financial sector to protect their credit rating. This capital is most often issued by companies in the utilities and communications sector to support long-term investment projects, such as infrastructure.

Perpetual debt

Hybrid capital can often be undated or ‘perpetual’ instruments and when issued by banks or insurers as Additional Tier 1 or Restricted Tier 1, must be undated.

Perpetual instruments the holder of which has no right to redemption under any circumstances (sometimes referred to as “true” perpetual instruments) are not loan relationships because they do not give rise to a monetary liability. However, “perpetual” instruments issued by banks, insurers, utilities and telecommunications companies normally give the holder the right to repayment of the principal in the event of liquidation. The fact that principal is only repaid on liquidation does not in itself preclude an instrument from constituting a monetary debt and will normally be considered to give rise to a monetary debt. They are therefore not true perpetual instruments and may be loan relationships.


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