Fund Platform Rebates to Become Taxable!

dunstonh

now that i've thought about it, i agree with HMRC that rebates are a kind of income.

So, does that mean other retailers offering discounts, cashbacks, two for ones etc should be looking at tax on those too?

Michael_Nottingham

Exactly dunstonh

What a can of worms - will they be coming after cashback websites next?

This is just a load of additional administration / effort for everyone - for surely very little gain as their guidance note basically admits

grey_gym_sock

dunstonh wrote: »

So, does that mean other retailers offering discounts, cashbacks, two for ones etc should be looking at tax on those too?

nah, coz what's going on overall for most retailer transactions is that you're buying a product (or service) for a price. the cashback makes the effective price slightly lower than it would otherwise be.

with an investment, overall you are investing some capital, and everything you get back is either income or return of capital. in the absence of any tax-free wrapper, it seems reasonable that everything you get out of an investment should either be taxable as income, or should count towards the taxable capital gain you might make (or reduce your taxable capital loss).

the retailer's costs will reduce your income, or your capital gain, or a bit of both. so in that sense they're tax-deductible. to be consistent, a rebate should increase your income or capital gain, depending on how it's paid. so it's inconsistent to allow it to escape the scope of both income and CGT - unless the investment is in a tax-free wrapper, in which case it's inconsistent to bring it within the scope of tax.

wakeupalarm

Can you transfer into "clean" funds without it being treated as a sale for CGT?

jem16

grey_gym_sock wrote: »

nah, coz what's going on overall for most retailer transactions is that you're buying a product (or service) for a price. the cashback makes the effective price slightly lower than it would otherwise be.

That's exactly what is happening when I purchase an investment fund which is a product. Basically I'm getting a reduction on the cost of that product.

with an investment, overall you are investing some capital, and everything you get back is either income or return of capital. in the absence of any tax-free wrapper, it seems reasonable that everything you get out of an investment should either be taxable as income, or should count towards the taxable capital gain you might make (or reduce your taxable capital loss).

Exactly. With an IFA unbundled platform, you are getting discounts/rebates on the costs of purchasing the fund/s - ie the platform commission and the IFA trail commission. These rebates are then replaced with the platform fee and the IFA fee which, in most cases, works out exactly the same as the rebates. So you have neither made a capital gain nor have you made any income. So why should there be tax?

In DIY cases, the rebate is exactly the same as above. You then have the platform fee to make up but the IFA fee will not happen so in this case you are receiving a discount on the part of the service you are not using. Why should you then have to pay tax on something you are not using?

rpc

So if there is a clean class and a dirty class with a rebate, then income tax is payable on the rebate in the dirty case but not payable on the missing commission in the clean case?

Rebated commission should leave the investor in the same situation as a clean (or even less-dirty) class of fund IMHO. Taxing it does not make sense to me.

Lokolo

Right well this is awkward. I'm going to owe the tax man 10p or something.

I assume brokers are going to have to send out a statement every year? And I suppose for new purchases from next year it won't matter as trail is being banned (only for new purchases, I assume already owned will still have trail and therefore taxable)?

grey_gym_sock

the HMRC note says that 20% tax should be deducted by the provider where this applies. i assume they'll also need to send of statement about it. so basic rate tax payers should already have paid the right amount. and higher rate payers will have to pay more, the same as with interest, and so on.

going back to whether this makes sense in theory ...

suppose i make an investment of £1000, receive income of £100 from it, and later sell it for £2000. that gives me £100 of taxable income, and a £1000 taxable capital gain. let's say that was a clean fund class.

suppose i instead invested in an equivalent dirty fund class. i still invested £1000 and sold for £2000. this time the income received is only £99. but i also get a £1 rebate. it's a full rebate, so i get the same return with the dirty class as with the clean class. so why should my tax position be any different in this case?

that is not the only inconsistency, though. it's also inconsistent that an explicit platform fee can't be offset to reduce the taxable income, while a bundled 1 effectively can.

(i realize i'm not onto a winner here, in asking for the tax system to be logical )

jamesd

Linton wrote: »

According to iii HMRC rules prevent fund rebates being paid into the ISA, which is why they pay them into the non-ISA Trading Account.

That is not, in general, a true claim by iii. HMRC has specific rules about rebates that can be paid into the ISA account, specifically 10.47b and 10.47c of the Guidance Notes for ISA Managers:

"AMF rebate

10.47b This occurs when the Fund Manager has an agreement with the ISA manager - who in turn has an agreement with the investor - to charge a reduced AMF on a fund.

Where, because of procedural restrictions, only a single AMF charging facility exists, the Fund Manager will refund the AMF overcharge to the ISA manager. The ISA manager then will reimburse each investor’s ISA to put them in the position they would have been in had the correct (reduced AMF) been charged. This reimbursement is not a fresh subscription and does not count towards the annual subscription limit.

For example, the fund has a fixed fee of 3% but the manager negotiates either a reduced fee of 2% or ‘such reduction as he can negotiate’. The agreement with the investor is for a 2% fee or such reduced fee as can be negotiated. The rebate can go into the ISA without counting as a fresh subscription.

AMF rebate (WRAP platforms containing a CASH account)

10.47c Where the investor holds several different investment types, including an ISA, on a WRAP platform and the WRAP platform contains a CASH account, the rebate may be paid into the CASH account (which does not affect the ISA) or (if it is paid in respect of an ISA investment) directly into the ISA account, in which case it does not count as a fresh subscription.

If the rebate is paid into the CASH account, the WRAP manager may then transfer that part of the rebate that relates to an ISA investment to the ISA account. If he does, the transferred rebate will not count as a fresh subscription"

Given the guidance from HMRC it would be interesting to know why iii are making their claim about what HMRC says.

jamesd

A request to my main fund place:

"I note that HMRC has announced that certain types of fund rebates are taxable, with basic rate tax required to be deducted at source by the platform operator. See http://www.candidmoney.com/articles/269/trail-commission-rebates-to-be-taxed and HMRC technical note at http://www.hmrc.gov.uk/briefs/income-tax/brief0413-technical-note.pdf .

Please review my request censored from censored 2011 (it contains the Guidance Notes things in my last reply) and commence paying the ISA portion of my rebates into my ISA cash account so that there is no possibility of them either being taxable or counting as fresh subscriptions.

If you aren't going to do this sort of thing, please say why and what alternatives might be used, such as offering clean fund classes instead. If there are plans to consider this but no fixed timeline please either set up a reminder to tell me when or tell me when I should ask again to check on progress.

Please also confirm that your practice of paying SIPP rebates into the SPP cash account is believed by you, without being personal advice, to exempt them from this taxation and that there will be no deduction of basic rate tax from SIPP rebates.

I expect that there may be discussions going on internally about this matter and know that it is a busy time of year. For that reason it's entirely acceptable to me to simply make a placeholder reply and provide a more full one in say a month, or some other timeframe suggested by you."