Fund Platform Rebates to Become Taxable!

Linton

I have had a note from iii to say that from this tax year (presumably 2013-2014) they will be able to pay rebates into ISAs and SIPPs.

SnowMan

This sounds like good news for investors, even though at first sight it looks like bad news. And it is good news for those interested in transparency and removing bias.


Let's say that a large market share platform contacts a fund provider and says 'if you pay investors through us a larger unit rebate than if they invested in the same fund with another platform, then we will do lots of marketing for you'. That large platform can then charge a larger platform fee to investors who will be attracted by the larger unit rebates which will offset the higher platform costs. The fund manager is also happy because it gets more market share for its funds relative to its rival fund managers' funds because of the heavy marketing.

The smaller platform, run at minimal cost, is only able to negotiate a smaller unit rebate for its investors but may only charge a smaller platform fee. The smaller platform will have limited market share because of the lower unit rebates to investors.

The marketing costs for the large platform although significant are much less than the money the large platform derives from platform fees and from high market share.

The end result is that all investors are paying the marketing costs of the large platform whether they invest through the large or smaller platform. If they invest through the larger platform the investor pays through the higher platform fee, if they end up investing through the smaller platform they end up paying through the lower unit rebate.

And a bias towards funds which offer the best rebates to investors in the large platform exists, very similarly as in the existing commission based system. Cash rebates and unit rebates are very similar in nature and logically both should be banned in the interests of transparency.


In this context, the tax on unit rebates makes the unit rebate approach less tax efficient (for money invested outside an ISA or SIPP) and clean classes become more attractive.

With clean classes the fund manager has to either offer their clean class to both the large and small platform or just to the large platform. By their transparent nature and for practical reasons it is more difficult (albeit not impossible) for the manager just to offer its cheapest clean class for a particular fund to the large platform. If a single clean class is offered by the fund manager to all platforms, then competition between platforms becomes more of a case of which platform can offer the fund at the cheapest administrative cost.

The large platform, then is no longer able to charge its larger platform fee to investors (as investors will invest with their cheaper competitors) or engage in heavy marketing costs for promoting funds which pay its investors the highest rebates relative to its competitor platforms.

The removal of marketing costs indirectly filters through to cheaper cost for investors.

joerugby

Just transferred £160 of HL loyalty bonuses accumulated since January into our 2012/13 ISA accounts to use up the remainder of our allowances.

Seemed like a good idea

xylophone

The Investment Times issue for 6/7 April will have an announcement about this.

And indeed it did!:)

koru

Has anyone seen anything to suggest that this new HMRC policy might be overturned, or overridden by new tax legislation, so that rebates are not taxable?

I have a few funds where I was in no hurry to switch to clean classes, because I was receiving the same or a bigger rebate with the dirty class. However, this is no longer the case if the rebate is taxable. So, I should probably switch, but this will cost me £20-25 in transaction fees for each fund, so I don't want to incur this cost and then find rebates are no longer taxable and I would have been better off or no worse off if I had stuck with the dirty classes. Anyone come across any serious suggestions that they might cease to be taxable? (I realise that dirty classes will be phased out in 2016, but that's a long time away from now.)

chris1

koru wrote: »

Has anyone seen anything to suggest that this new HMRC policy might be overturned, or overridden by new tax legislation, so that rebates are not taxable?

I have a few funds where I was in no hurry to switch to clean classes, because I was receiving the same or a bigger rebate with the dirty class. However, this is no longer the case if the rebate is taxable. So, I should probably switch, but this will cost me £20-25 in transaction fees for each fund, so I don't want to incur this cost and then find rebates are no longer taxable and I would have been better off or no worse off if I had stuck with the dirty classes. Anyone come across any serious suggestions that they might cease to be taxable? (I realise that dirty classes will be phased out in 2016, but that's a long time away from now.)

There doesn't appear to be much chance of HMRC changing their minds.

As a result of the change, I know of two companies who are stopping rebating commission at all on funds outside ISAs - who are you using?

SnowMan

koru wrote: »

Has anyone seen anything to suggest that this new HMRC policy might be overturned, or overridden by new tax legislation, so that rebates are not taxable?

There was a suggestion that Hargreaves Lansdown were looking into the possibility of challenging the decision see here. Not sure what came of that.

From a transparency perspective it would be awful if the HMRC policy was overturned

koru

chris1 wrote: »

As a result of the change, I know of two companies who are stopping rebating commission at all on funds outside ISAs - who are you using?

ATS and Interactive Investor, mainly.

david78

This came in force on 6 April 2013. HL are paying rebates on investments in their S&S ISA into the ISA now to avoid the tax charge (and the same for their SIPP). The special "loyalty bonus" account is being retained if you have their Fund&Share account. They will be including payments into the loyalty bonus account on the income tax statements sent out from 2014.