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Kick out the plans

Hannah Stodell reports that product providers are struggling to understand the HMRC’s kick-out warning

The structured product sector is in limbo as providers try to assess the warning from HM Revenue £ Customs that some kick-out plans may have been wrongly promoted as Isa-eligible.

Money Marketing revealed last week that HMRC issued a bulletin on March 25 warning that it had identified certain kick-out plans using securities with an early redemption feature that did not satisfy investment conditions to qualify for inclusion in a stocks and shares Isa.

It is now calling on Isa managers to check if their products breach the rule but has refused to clarify how many problems it has uncovered. It will also not say what will happen to the Isa allowance of clients who have invested in non-qualifying securities, nor specify the tax liabilities they could incur.

The bulletin says a condition for qualifying securities is that “at the date on which the security is purchased by the Isa manager, the terms on which it was issued do not require the loan to be repaid or the security to be re-purchased or redeemed with the period of five years from the date” or “allow the holder to require the loan to be repaid or the security to be repurchased or redeemed within the period of five years from that date, except in circumstances which are neither certain nor likely to occur.”

Providers say the issue hinges on the issue of “certainty” of repayment within five years.

Blue Sky Asset Management chief executive Chris Taylor believes the key to this is in the interpretation of kick-out conditions and Isa eligibility definitions.

He says lawyers and tax experts are poring over the ambiguous wording of the bulletin to try to work out what exactly it means.

Taylor says: “We will review our products but different securities’ issuance programmes use different wording, which may have some bearing on this. HMRC’s blanket reference to all autocalls in this bulletin, is, based on our understanding, incorrect.”

’These plans have been around for eight or nine years, what has suddenly prompted this? It seems like an awful lot of work for very little reward in terms of revenue’

Barclays Capital believes its kick-out plans are unaffected, saying the securities within them are not required to be redeemed before maturity.

A spokesman says: “Barclays has issued a number of securities which have been included in Isas and which have been described as including a kick-out feature. These securities do not contain an early redemption clause which is triggered by a so-called kick-out event. Therefore, we believe that the securities are not affected by HMRC’s comments in the bulletin.”

But other providers are taking a softer stance on the issue until they have taken tax and legal advice and have more clarity from HMRC. The UK Structured Products Association continues to consult with its members on the issue.

Structured product provider Meteor Asset Management managing director Graham Devile says: “The view is generally that everything should be ok but it is still a case of a watching brief and, along with everyone else, we are looking at this.”

Devile questions what instigated the bulletin. He says: “These plans have been around for eight or nine years, what has suddenly prompted this? It seems like an awful lot of work for very little reward in terms of revenue.”

HMRC says a further statement will not be given before May or June. Lowes Financial Management managing director Ian Lowes says the current information is too vague to ascertain the implications.

He says: “We just do not have any information other than this bulletin and what Barclays has issued. It is unclear as to the impact of the statement contained but I am sure the providers are addressing this issue and will report to us in due course.”

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