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Advisers must act now to tackle RDR tax costs

Many in the industry hoped the changes to adviser remuneration resulting from the retail distribution review would have minimal tax implications but they were disappointed. The tax changes look to be wide-ranging and may affect the number of products offered.

Fortunately, some of the hidden tax costs of the RDR can be mitigated if advisers and providers act now. For example, the effect on pension policies can be managed. Currently, tax relief for pension contributions is obtained on the premium, including the adviser charges. If, after the RDR, the pension arrangements are set up so that the individual pays the adviser directly, there is a significant cost.

Constructing pensions so that adviser fees are paid from the pension will mitigate the 100 per cent increase in the cost of adviser charges some taxpayers would suffer. HM Revenue & Customs has confirmed this will not trigger any tax liability on the policyholder or insurer and so management and product teams of life offices will now need to address the structure of their pension policies to remain competitive.

The UK life policy sector will be significantly affected by the RDR and related tax changes. Adviser charges will not be deductible for most life offices following the RDR, which will, in effect, increase the adviser charges payable by 25 per cent.

Onshore bonds will also be less competitive as a result of changes to tax structures, which could reduce new business volumes. Life groups should be assessing their post-RDR business volumes and looking to offer replacement products where appropriate.

The implications for adviser-charging and VAT are complex. There is a current exemption for intermediation of financial products, which, in practice, has applied where an adviser receives commission from a product provider. The move from commission to a fee-based structure will result in advisers having to determine the VAT liability of their services, which should be ascertained by a customer’s intention at the outset of the engagement. Where a client intends to buy a product, advisers may treat their services as VAT-exempt.

Advisers will need to obtain and keep the documentation required to support the VAT treatment. Careful consideration also needs to be given to the VAT liability of ongoing fees and the procedural and VAT systems changes that will be required before the RDR.

The tax implications will also have a significant impact on system requirements and product providers should factor these into their timetables now.

The RDR brings a greater number of possible tax outcomes than anticipated and unless the position is actively managed, this could be costly and lead to products becoming uncompetitive.

Neil Rolfe is an associate partner and Andrew Bailey is a partner at Ernst & Young

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Comments

There are 6 comments at the moment, we would love to hear your opinion too.

  1. And you forgot to add the VAT added to the adviser charge in a firm’s GABRIEL Return.

  2. It’s time to stop this madness now.

    STOP RDR

  3. I suspect that many of the life companies that stood shoulder to shoulder with the FSA and supported RDR are now rather regretting their stance.

    Whilst everyone was worried about qualifications all the detail like this was missed. RDR is looking increasingly unworkable. Maybe the TSC was right and it should be delayed for a year or so whilst this mess is sorted out.

  4. I (and a good few others) said it yrs ago when RDR was first penned and ever since and I’ll say it again it is a dogs breakfast on EVERY level not just qualifications which pro RDR sayers will have you believe.

    Even some of them are waking up (although where the bloody hell they were for the last few yrs god only knows).

    RDR = The Emperor’s New Clothes – at last some are starting to see it for what it is

    It will not and cannot work !!!

  5. In all seriousness, what is the point of ‘planning’ when the goal posts will be moved well before RDR. It is plain that recommendations to clients are going to be skewed drastically by the tax implications of the advice to the advisory firm and the potential PI/ Regulatory risk of the type of advice given. Thus, instead of advice influenced by commission, the advice is guided by risk centric analysis and tax considerations from the advisory firm’s perspective. Not exactly a step forward although of course no one will acknowledge that this is actually happening.

  6. The whole think in such a total mess it should be scrapped and those responsible fired.

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