INVESTMENT FUND REBATES - CAPITAL GAINS TAX BARRIER REMOVED

We recently reported that investment funds which pay rebates to investors will attract an additional tax. You are now permitted to switch from these funds to new funds operating a simplified charging structure without attracting capital gains tax.

Key points

  • Switches between investment funds operating with investment fund rebates to newer clean charges without the rebates will not attract capital gains tax
  • Background to investment fund rebates
  • Explanation of the new tax on investment fund rebates
  • What you should do next

Investment fund rebates – background

From January 2013 investment funds are no longer permitted to pay commission to financial advisers. Traditionally, investment funds might charge a typical annual management charge of 1.5%. This might be made up of:

  • 0.75% to the fund manager
  • 0.25% for administration of the investment wrapper
  • 0.5% commission to the financial adviser

The new rules mean that the last part cannot be paid without an explicit agreement of the client through a fee. This has mean that many existing funds had to find a method to ‘rebate’ the commission back to the investor. This led to HMRC deciding that these investment fund rebates should be taxable from April 2013. For more information see our article on the taxation of investment fund rebates.

Clean share classes

Some investment funds has responded by issuing new clean share classes. This means that the new fund is exactly the same as the old fund, but it simply strips out the old commission, meaning that it does not need to be rebated. This simplifies the charges and removes the new tax on investment fund rebates. Eventually, we expect all investment funds to operate in this way.

Investment fund switches – capital gains tax

With the extra tax on investment fund rebates, you would probably think that you should switch to a different fund without this charging mechanism. Unfortunately, it isn’t as simple as that. If you switch investment funds this could potentially lead to a capital gains tax liability (taxed at 18% or 28%). Therefore, switches on this basis should be taken with care.

HMRC decision to remove capital gains tax on switches to clean share classes

The good news is that HMRC has announced that switches between funds from the old investment fund rebate model to a newer clean share price will not attract capital gains tax. This will only apply to switches from the same fund on the old charging basis to the new clean version. The move means that you can alter your investment strategy where clean fund classes exist to avoid the new tax on investment fund rebates.

What you should do next

If you’ve read this far you will realise that this is a technical issue which requires care expertise. We recommend that you seek advice from your financial adviser before making any changes to your investment funds which could result in a capital gains tax liability. We will be in touch with all clients at your annual reviews to take this change into consideration. Contact us if you have any concerns or questions.

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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