IMPORTANT NOTE - Following a legal challenge, a tax tribunal ruled that Hargreaves Lansdowne’s ‘loyalty bonus’ (which appears to be a rebate) did not meet one of the four compulsory requirements for a payment to be deemed as an ‘annual payment.’ In time, this decision may result in a tax saving for investors in the Collective Investment Account on our platform and therefore the content of this article will become obsolete.
Much has been made of the outcomes of HMRC’s confirmation that rebates to customers on platforms should always have been taxed. We explain what this means for investors.
Since 6 April 2013, HM Revenue and Customs has expected platform providers to deduct basic rate income tax from fund rebates and adviser commission given up (pre- RDR) that is passed on to investors by platform fund services, such as Old Mutual Wealth’s Collective Investment Account (CIA). This would apply whether the payment was in the form of additional units or cash.
The investor should then account for any additional or higher rate tax through self-assessment. This is because such payments to investors are deemed annual payments under Income Tax legislation (section 683 of Income Tax (Trading and Other Income) Act 2005).
If the value of the additional units paid is £100, then the payer will have to deduct an amount equal to the basic rate of tax i.e. £20 (20% of £100). The tax status of the investor will then dictate either the amount of additional tax to be paid on the additional income of £100, the amount to be reclaimed, or if no further action is required. See Figure 1 for what this means for investors in platform products.
The class of funds in which the investor is able to invest in, via accounts such as the CIA, must also be considered when determining the effect on the investors tax liability.
Typical AMC of 1.5% for an equity fund. There are three elements to a bundled fund charge:
- fund manager charge
- platform rebate; and
- adviser commission.
Typical AMC of 0.75% for an equity fund. This share class is not necessarily free of rebate, but has a lower gross AMC than the bundled share class. The charge is limited to Fund Manager Charge. The Fund Manager may choose to rebate some of this charge to the platform.
The term super clean refers to a share class with a lower AMC than the clean one due to reducing the fund management charge. The expectation with ‘super clean’ funds is that this same net cost is reflected in the pricing of a super clean share class without the need for any rebates.
The term ‘clean’ can be a little misleading, with its implication that ‘clean’ will provide a better client outcome than a ‘bundled share class’. This is often untrue as some providers have negotiated rebates on bundled funds greater than half of the AMC which brings the net cost below that of ‘clean’ funds.
Figure 1. What does this mean for investors who invest in platform products?
|Wrapped or unwrapped investment type
||Will any rebates/commission give up be taxable?
||What level of UK tax is payable?
||Gross or net payment?
|Onshore Life Bond
||No. This is due to the fact that the life company (who is entitled to the rebate as the owner of the funds) will rebate to the investor by enhancing the value of the life fund which is already subject to corporation tax at 20%
||No. This is due to the fact that the life company (who is entitled to the rebate as the owner of the funds) will rebate to the investor by enhancing the value of the life fund which is usually subject to corporation tax at 0%
|Collective investments via a Platform service - Retail Individual UK investors
||Yes. 20% tax deducted at source.
||Tax is payable at the investor’s marginal rate (but 20% is deducted at source)
|Collective investments via a Platform service - Certain other UK or non UK investors
||No, for overseas investors regulation stipulates that annual payments must not be taxed at source.
Certain other investors (charities for example) are entitled to receive annual payments gross, but if received net will be able to re-claim the tax.
When advising on the best option for investors the following should be considered:
- taxation in terms of annual payments
- taxation of adviser remuneration for post RDR business and advice events
- fund performance after costs
- the individual’s tax status
- the individual’s goals for the investment
With each customer’s personal situation and requirements being different, it is important that all product and fund charges, rebates and any tax are all factored in before being able to identify which is the most appropriate solution for the customer.