RDR requires a fundamental shift from commission to fees, changing the way adviser remuneration interacts with the client’s tax position. The payment of commission generally has the effect of keeping the adviser’s remuneration outside the client’s tax affairs, whereas cashing in investments to meet fees can bring direct tax consequences. Clients will have choice of whether to pay fees directly or to opt for provider facilitation by cashing in investments. A likely outcome is that we will see various tax advantages and disadvantages in the assorted methods of paying fees.
While tax will not be the sole consideration, it should be part of the equation to enable clients to pay fees with the least possible financial impact. Indeed, for an adviser prepared to consider this matter, there ought to be an opportunity to offer real benefit to clients assuming the provider has sufficient fee facilitation options.
Given that a client is able to pay fees direct, an initial postulation is arguably that investments should not be cashed in to meet adviser fees where this would cause tax detriment compared with writing a cheque but should be cashed in where this would provide tax advantage compared with writing a cheque.
The tax treatment of cashing in to meet fees can range from the advantageous to the disadvantageous. On the positive side will be situations where the client can effectively receive tax relief on the adviser fee or where a tax-free allowance can be used to pay the fee. On the negative side, however, will be incurring an unnecessary tax charge or depleting the benefit of a valuable tax break.
Taking fees from a pension looks advantageous compared with writing a cheque. Of course, the ability to do this is effectively restricted and any such fees must be commercially commensurate with the advice given on the pension. Conversely, taking a fee from a “tax-free” Isa pot, where the client’s allowance is limited looks disadvantageous. With collectives and bonds, the analysis is more complex and we still need clarification on a few points.
In addition, for some time at least, trail commission will co-exist with fees adding a further tax dimension. Another aspect for new investments is the option of deducting the fee before investing a net amount or investing the full amount, then cashing in to meet the fee. Furthermore, the tax treatment of platform fees, fund rebates and share class switches will need to be factored into equations.
In truth, the move to fees will make tax more complex rather than less. There is unlikely to be a single answer to whether it is better to pay fees direct or through cashing in. Most scenarios will be client-specific, with no simple one-size-fits-all rule. Where adviser fees are causing tax consequences, it will be essential to stay on top of the calculations to understand the effect and advise the client accordingly.
With fees replacing commission, we are entering new tax ground in terms of the precise tax treatment of adviser remuneration in relation to the various tax wrappers. Work is currently afoot to obtain requisite clarity after which further insight and analysis will be possible. Fees bring a new dimension to tax not hitherto seen in the adviser world and a facet upon which I hope to expand over the coming months.
Paul Kennedy is head of tax planning at FundsNetwork