In Martin Bamford’s thoughtful opinion piece, Will someone please think of the clients, he says: “How HMRC reached the illogical conclusion that a return of charges paid by an investor constitutes income is beyond rational understanding of the tax system.”
I looked upon this initially from the point of view of a unit trust or OEIC held outside of an Isa wrapper. For many such funds the annual management charge would be deducted from income yield, rather than capital. So it is reasonable to see how a fund rebate would be equivalent to passing on some of that income yield, and hence taxable.
Perhaps that is the thinking behind HMRC’s decision.
I then started extending my thoughts and saw that for funds that deduct charges from capital, rather than income, the HMRC approach is unreasonable.
Also for funds held within Isas, whereby the rebates are set aside in a non-Isa cash account so as not to be regarded as part of that tax year’s Isa subscription, should those rebates be regarded as taxable income, the HMRC approach is also unreasonable.
Clearly it is not a simple or straightforward matter to consider.
However, I have resisted the urge to become annoyed as the resulting progression towards clean funds has to be a good thing from the consumer’s perspective, albeit helped along by HMRC decisions difficult to fathom.