On 25th March 2013 HMRC announced, to our surprise, that from 6th April 2013 they will expect income tax to be paid on any commission rebates issued by fund managers. This tax change will not apply to funds held in ISAs or Pensions, but it may effect individuals, trustees, attorneys and deputies alike.

We anticipate that we have been quicker than most to explain the impact on our clients’ investments, and we expect to see some concerning headlines over the next few days. This email is intended to highlight our understanding of the situation and explain the actions we are taking, where relevant.

As a firm, we charge explicit fees for our services and believe that any commissions paid by fund managers should be passed to clients through cash rebates to their plans or by increasing their fund value by the purchase of more investment units. Clients who have similar agreements with professional advisers, or who have arranged their own investments through ‘discount brokers’ (for example) may also be receiving such rebates.

Whilst the refund of the commissions may historically have meant individuals have paid the lowest net cost for the funds in their portfolios, it now seems that the change in HMRC’s stance on taxation may mean a rebate strategy is no longer advisable. It seems probable that clients should switch their current funds to ‘clean’ versions of the same fund (which do not include the payment of commission which would attract the income tax liability), but this may incur a capital gains tax charge.

Currently it is common that ‘clean’ funds will have a higher cost than those that pay commission, after the commission is rebated. But on the face of it, it appears ‘clean’ funds will be more suitable from now on, individuals do need to seek advice, to analyse total ongoing costs, penalties/switching costs, income and capital gains taxes.

HMRC admit their guidance has been misleading, this effectively means that these are new tax rules and will apply from 6th April 2013.

We are working with the plan providers to understand if they plan to challenge this, and what level of reporting they will assist with. We would also be happy to discuss the implications with you where relevant, and whilst any liability is unlikely to be due until 31st January 2015, HMRC’s brief effectively needs to be acted upon immediately.

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