One of the biggest changes in the Real Estate M&A sector over the last year is the ability to now insure tax risks which previously could have derailed corporate deals. In some cases, these known tax risks can now be ‘wrapped’ into Warranties & Indemnities (W&I) policies for no extra cost.
Traditionally, a buyer might have looked extremely unfavourably at a tax due diligence report that flagged certain issues, such as residency or trading vs investment. It might be that these were very minor risks (perhaps flagged as ‘green’ in a report) or significantly bigger risks that had large ‘worst case scenario quanta’ attached to them (perhaps flagged as ‘amber’ in a report). In previous years, tax advisors and lawyers might have advised serious caution or perhaps even advised against the deal going ahead.
Although the tax insurance market has been operating for a few years, it is only in recent months that the product has become much more user friendly, cost efficient and less cumbersome.
At least five insurers have employed in-house tax counsel to underwrite these specific tax risks in a very short space of time. By analysing the legal and tax opinion, along with how the ‘worst case scenario’ has been measured, insurers can determine within 24-48 hours whether the risk is insurable, and the likely rate (usually between 1%-6% of the limit needed). Further to this, tax underwriters are now advising as to whether these risks can be wrapped into a W&I policy and, if so, whether an additional cost is even needed. Very low risk known items such as residency or trading vs investment will often be added for free whereas larger risks might attract an additional premium.
In conclusion, insuring tax risks are becoming an integral part of any deal, especially when there is uncertainty in the application of certain tax laws. Tax insurance can eliminate a loss arising from a successful challenge by a tax authority meaning that corporate deals are less likely to be scuppered.