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Funds face 5% test on stocks and shares Isa

HM Revenue & Customs has warned some funds may become ineligible for inclusion in stocks and shares Isas following the implementation of the RDR.

HMRC’s latest Isa guidance says each fund that meets the Isa requirements must pass a “5 per cent test” in order to qualify for the stocks and shares component.

To pass the test, there must be no guarantee or agreement that investors will receive 95 per cent or more of their purchase price back within five years.

The nature of the investments held by the fund must not significantly limit the risk to the investor’s capital to 5 per cent loss or less within five years. The test is applied after any charges are taken.

HMRC says that after the RDR, some funds that currently meet the Isa requirements may become ineligible because both initial and ongoing fund charges are likely to fall once commission payments cease to be priced in.

It says: “For example, from the end of 2012, fund A’s initial charge is reduced to 0.5 per cent but it still has a guarantee that losses will be capped at 3 per cent. The fund would then only be eligible for the Isa cash component.”

HMRC says firms must identify any funds that may be affected and make changes to their systems and literature.

It says: “If the eligibility of particular funds for the Isa stocks and shares component is going to change, firms will need to identify all investors likely to be affected and, as appropriate, consider offering alternatives to the investors affected.”

AWD Chase de Vere head of communications Patrick Connolly says: “I cannot think of any mainstream Isa products that might be affected other than a small number of structured products.”



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