Fidelity - fees and rebate tax

saajan_12

I have an investment account with Fidelity, with funds invested in Fidelity Index World Fund P-Inc. I'm trying to make sense of the transaction reports, and it seems I have a regular credit called "rebate" and debit called "rebate tax". This is separate to the dividends and interest, which I can see listed separately. 

I can't tell what this would be, or why I'm being taxed on it. My only guess is its possibly the fee discount - the fund charges were listed as 0.12% discounted to 0.10%. However this is only ever described as a discount and not as any form of income. Also the fees aren't tax deducted, so I'm not sure why a discount on it would be taxable. 

Any ideas? 

Edit: missed a decimal on the fee %, thanks masonic!

masonic

It sounds like a rebate (rather than a discount of fund fees). Because this is a recurring payment representing pure income profit that you presumably have an entitlement to receive, it meets HMRC's definition of an annual payment, which is treated as income and taxed at source at the basic rate. If you are a higher rate taxpayer, you would have a further tax liability, whereas if you have available personal allowance you could reclaim the tax from HMRC.

Hargreaves Lansdown famously tried and failed in court to challenge HMRC's treatment of these payments.

Surely the fund fees in question are 0.12% and not 12%!

saajan_12

Hi masonic, thanks for the response. 

While it's labelled a "rebate" in the transaction report, ahead of investing it was always advertised as a discount to the 0.12%  fund fee. I don't have any right to it if I didn't pay the fund fee. Similar to if you get a regular discount on your phone bill, it doesn't suddenly become taxable income. 
I can't imagine the rationale on why they'd even structure it as a rebate instead of a discount on their fee (ie their profit) - what's in it for them? 

Also if anyone's familiar with how Fidelity's transaction reports are laid out, I'd appreciate some guidance. 

1. Interest on the cash amounts works out to approx 2.75% which is lower than the 3.45% they advertise. I thought it might be paid net of an assumed 20% tax, as this should be genuinely taxable income. However there's a separate line item for "Tax on Interest"

2. The fees should be 0.12% (pre discount above) for the ongoing fund charge and 0.20% for the platform fee. So id expect to pay 0.32% in total (or a twelfth of that each month) but it seems the amount actually deducted for fees is much lower, closer to just over half of that. 

masonic

saajan_12 said:

While it's labelled a "rebate" in the transaction report, ahead of investing it was always advertised as a discount to the 0.12%  fund fee. I don't have any right to it if I didn't pay the fund fee. Similar to if you get a regular discount on your phone bill, it doesn't suddenly become taxable income. 
I can't imagine the rationale on why they'd even structure it as a rebate instead of a discount on their fee (ie their profit) - what's in it for them?

It cannot be both a rebate and a discount. A discount is applied before you are charged a fee, whereas a discount is credited after a fee is taken. The rationale for them structuring it like this is because they do not have the power to change the fee you are charged by the separate fund management company. The fee is taken by the fund manager from within the investment and distributed between all investors in the fund - those who hold it at Fidelity and those who do not. If you had instead invested in the fictitious Fidelity Index World Fund Y-Inc with a lower AMC of 0.10%, then it would be a discount rather than a rebate. Examples of such an arrangement exist, but Fidelity have not created a discounted version of this fund specifically for its platform customers.

So there is no lack of clarity around the tax treatment of this rebate, or the fact that it is a rebate. There is also clear legal precedent from the High Court that you must pay tax on it.

saajan_12 said:

1. Interest on the cash amounts works out to approx 2.75% which is lower than the 3.45% they advertise. I thought it might be paid net of an assumed 20% tax, as this should be genuinely taxable income. However there's a separate line item for "Tax on Interest"

Tax should no longer be deducted at source from interest payments on cash.

saajan_12 said:

2. The fees should be 0.12% (pre discount above) for the ongoing fund charge and 0.20% for the platform fee. So id expect to pay 0.32% in total (or a twelfth of that each month) but it seems the amount actually deducted for fees is much lower, closer to just over half of that. 

If you hold >£250k, then the platform fee will be 0.20%. However, you do not pay the service fee on cash or any exchange traded investments you hold, so this could reduce it. In fact, you could shift the lot into a low cost global ETF and pay no platform fee at all for the Investment Account (something common to other providers as well). This would be a more significant saving than the 0.02% (minus tax) from the fund fee rebate.

dunstonh

It is funny that there is a rebate on the class P.   I could understand it on the dirty share class but not the clean share class (and Fidelity don't offer the super clean class A to their own customers directly).

Fidelity do have the ability to change the platform charge on accounts.  So, any special terms would normally be reflected in the platform charge and not a fund level (at least that is how they do it with IFAs).    

Albermarle

Fidelity do have the ability to change the platform charge on accounts

Not on the retail/personal investing side AFAIK.

Notepad_Phil

masonic said:
... Tax should no longer be deducted at source from interest payments on cash. ....

Just on this bit, Fidelity certainly still does this (I've seen it on Mrs Notepad's GIA account) and also on her Santander investment account. Santander is explicit that they have to pay the interest Net and only pay Gross if the investment account is held within an ISA. Though from a post of a few weeks ago, I believe some other GIA platforms do pay gross, so quite why the split on why they do it I don't know.

masonic

Notepad_Phil said:

masonic said:
... Tax should no longer be deducted at source from interest payments on cash. ....

Just on this bit, Fidelity certainly still does this (I've seen it on Mrs Notepad's GIA account) and also on her Santander investment account. Santander is explicit that they have to pay the interest Net and only pay Gross if the investment account is held within an ISA. Though from a post of a few weeks ago, I believe some other GIA platforms do pay gross, so quite why the split on why they do it I don't know.

That is strange. I do not believe there is any obligation for them to do so. Perhaps they are not considered 'deposit takers' as per this guidance: https://www.gov.uk/hmrc-internal-manuals/savings-and-investment-manual/saim9010

However, as you say, other investment providers seem to be able to pay interest gross, so what makes these two any different? Probably down to interpretation by their respective legal teams. Or perhaps they do not wish to implement a costly change to their systems to enable gross payment.

It must be frustrating for their customers who would not pay tax on the interest. Perhaps they'll accept the now defunct R85 form for gross payment. It's not even listed any more on the HMRC website.

Sea_Shell

My DH has had interest taxed by Fidelity, rather than paid gross, on the cash in his CMA.

He's down less than £1 .     I posted about it round here... somewhere?? *

(The search function is rubbish!!)



* Found it!   It was my own thread...Doh!!!   

saajan_12

Thanks for all the responses! On the interest point, their FAQ pages do state it's paid net of interest, so that's not unexpected in principle. I don't have a huge view either way on this (net or gross) as it would all come out in the wash through self assessment. My issue is that it seems to be deducted twice, since the amount of interest credited is lower than the 3.45% (the difference is approximately equivalent to 20% tax) and then a separate line item for "Tax on interest". That's of course assuming there isn't another explanation for the difference in interest rate. 

Notepad_Phil

saajan_12 said:

Thanks for all the responses! On the interest point, their FAQ pages do state it's paid net of interest, so that's not unexpected in principle. I don't have a huge view either way on this (net or gross) as it would all come out in the wash through self assessment. My issue is that it seems to be deducted twice, since the amount of interest credited is lower than the 3.45% (the difference is approximately equivalent to 20% tax) and then a separate line item for "Tax on interest". That's of course assuming there isn't another explanation for the difference in interest rate. 

I think you might be double counting. Without logging in I'm not 100% certain, but I think the separate 'tax on interest' line is just a note it's not actually subtracted off the running balance. So you get the interest (which has the 20% tax taken off) added onto the running balance but the tax line isn't taken off from that.