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HMRC proposes U-turn on Isa rebates

HM Revenue & Customs is proposing taxation changes which will allow annual management fee rebates due on Isa investments to be deposited directly in clients’ Isas without constituting a contribution.

HMRC consulted Isa managers, industry representatives and interested parties on the manager’s rebate system and published Isa bulletin 8 on February 8 outlining how the taxation of the system should work.

It reads: “Where the investor holds several different investment types, including an Isa, on a wrap platform and the wrap platform contains a cash account, the rebate of the over charged annual management fee may be paid into the cash account which does not affect the Isa or if the rebate is paid in respect of an Isa investment directly into the Isa account, in which case it does not count as a fresh subscription.

“If the rebate is paid into the cash account, the wrap manager may then transfer that part of the rebate that relates to an Isa investment to the Isa account. If he does, the transferred rebate will not count as a fresh subscription.”

Last July, WH Ireland adviser Trevor Durham contacted HMRC to question whether annual management fee rebates could be deposited in clients’ Isas without constituting a contribution after noting the handling of rebates differed between the Transact and Lifetime wraps.

At the time HMRC said: “The answer must be that they cannot. Or rather, if they are, they must be treated as an additional subscription and reported as such.

“We wouldn’t have a problem if the wrap manager charged a lower annual administration fee and kept any fees reimbursed to them by the individual fund managers. Nor would we have a problem if the wrap manager collected the annual administration fee from outside the Isa account and paid the reimbursed fees into the same (non-Isa) account.”

On Norwich Union’s Lifetime wrap, where an annual management fee rebate is received in respect of Isa holdings, the rebate is attributed to the Isa.

This differs to how the company dealt with rebates in previous years, where they were made outside of the Isa. NU says the change is being taken into account in the remediation exercise it is undertaking with customers.

NU proposition manager James Dalby says: “There is a very clear distinction HMRC tried to bring out in February between an IFA rebating trail commission versus a platform having contractual rebates between themselves and fund managers that are built in and applied for the benefit of a customer.

“I suspect the guidance issued was about making people aware that there was that distinction.”

Transact says it has always allowed the £7,200 maximum allowable to be paid into an Isa by setting up a separate general investment account for clients from which to pay all the Isa fees including adviser remuneration.

Head of marketing Malcolm Murray says if AMF rebates had been construed as a contribution it would have opened the floodgate for 40 per cent tax relief claims on pension wrappers.

He said: “If that logic was followed then it would mean that rebates from fund managers held within a pension wrapper should be eligible for tax relief. We would be talking millions of pounds of claims for past rebates. We’ve got over £2bn of pension money, can you imagine on the rebates alone what the tax relief would amount to? Hence HMRC have issued bulletin 8 to clear it up.”

HMRC’s consultation has ended and it is considering the replies. It says bulletin 8 was issued in response to industry requests that it review its guidance in the area.

A HMRC spokesman says: “Bulletin 8 does give a different answer to earlier emails from us in July 2008. But that was our view at the time, before we received representations and consulted more widely with representative bodies.”

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