What just happened?
A Technical Note with draft guidance was issued by HMRC on 25 March which stated that cash or unit rebates paid into unwrapped collective accounts are taxable as an ‘annual payment’ for income tax purposes. All platforms are affected by this. Basic rate tax will be deducted at source and investors should account for any higher rate or additional tax through Self Assessment (or claim back if appropriate). Payments coming from an offshore business will need payment in full for Self Assessment as they will not have had any UK tax deducted at source.
Rebates into Isas and Sipps (provided the rebate is paid into the Sipp not to the member) are unaffected, unwrapped collectives definitely are, bonds might be depending on how they are treated, but onshore bonds probably won’t because the life fund is already subject to corporation tax.
Why the rush?
HMRC argue there has been no change, this should have been happening already and any delay would require a change to legislation. So there. There will, at least, be no retrospective taxation of past rebates. There is representation being made to ministers, but it is safer to assume the position does not change. The preferable solution would have been to delay the deadline for 12 months until 6 April 2014 to coincide with the likely date for the FCA ban on rebates, then move to clean share classes.
What to do now
The tax liability is likely to be very small for most clients, although you will need to weigh this up. Moving from funds with rebates to completely clean share classes is not necessarily straight forward. Whilst the draft regulations state that it is not necessarily a CGT event, this depends on whether it is a sale and repurchase or a straightforward conversion, so it might be best handled as part of the normal review process. This is a judgement call you will need to make. I would recommend writing to all clients who have assets on a platform to inform them of the current situation.
In making that decision, and drafting your letter, you might want to consider the following:
What are you committed to under your client agreement? Are you responsible for tax advice, should you be referring to or liaising with your clients’ accountants?
Has your platform confirmed how all of its products will be treated yet? Some may be liaising with HMRC for a specific opinion.
How will you deal with, and charge for, advice requested as a result of your letter?
How many clients are likely to be materially affected by this?
You may also wish to cover this off in a suitability report if you are recommending share classes with rebates.
What to do next
This forces the issue on clean share classes, ahead of the FSA’s final word. The debate is pretty much over, and clean share classes will be the only viable option. Clean share classes sound better, but in many cases fund costs are being levelled up not down, and the ability for platforms or advisers to negotiate discounts is limited. Standard Life and Skandia have already made it known that they intend to use their clout to negotiate lower cost share classes, which is sensible for them. It’s unlikely that any IFA could negotiate its own share class without guaranteeing sufficient asset inflow to compromise its independence. Unintended consequences could be the emergence of a ‘restricted’ share class, and less price pressure on fund management fees. Not what advisers or investors want.
You’ll need to decide when to adopt clean share classes. In the interim, it’s is worth checking with your platforms what reporting they can offer to help can quantify your clients’ tax liabilities.
Phil Young is managing director of threesixty