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Chapter CFM37830

Document Cited in Related
Vincent
Published date16 April 2016
Record NumberCFM37830

The Hybrid Capital Instrument rules apply to loan relationships that fall within a bespoke definition of hybrid capital instrument for tax purposes - see CFM37840.

This section of the guidance provides a general description of the commercial background to hybrid capital.

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

Hybrid capital differs from normal debt instruments in that they contain some limited equity-like features.

The Corporation Tax rules allow businesses to deduct interest expenses (and other costs of borrowing) in determining taxable profits, but not to deduct distributions of profit to shareholders.

Hybrid capital may include a right for the issuer to cancel or defer interest payments and/or the instrument may contain terms that allow the principal to be released or converted into shares in certain circumstances.

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

Who issues hybrid capital?

Banks and insurance companies are required to hold a certain amount of regulatory capital. This capital usually includes a mixture of share and debt funding. The regulations covering this regulatory capital require that debt instruments issued to raise these funds must have features that allow the bank or insurer to continue operating in the event of the bank or insurer coming under financial strain and having depleted levels of capital. This means the...

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