In a surprise move, HMRC has announced that investment fund rebates are to be taxed from the start of this tax year (6th April 2013). This article explains investment fund rebates and informs you of the tax implications. This move is a surprise given that the Regulator has already planned to ban this practice from next year.

Key points:

  • Investment fund rebates are now taxed
  • Who this affects
  • What are investment fund rebates?
  • How investment fund rebates will be taxed
  • Practical steps you can take

Who should be interested in investment fund rebates?

You should be interested in investment fund rebates if you have bought funds on some sort of investment platform – such as a wrap, fund supermarket. This might include unit trusts and OEICs, investment bonds or general investment accounts.

This does not affect investments in pensions or ISAs, since these are largely tax-free.

What are investment fund rebates?

This is a complex area. When you buy retail investment funds via investment platforms, the fund will usually have an annual management charge. Often part of this charge is passed back to the investor in the form of investment fund rebates. This is a legacy of the old commission paying funds that used to operate before the changes made by the Retail Distribution Review.

When we recommend investments to clients, we usually buy them through an investment platform. This platform will levy a charge for the administration of your investments, and rebate the excess over the fund management charge to you.  HMRC has taken the view that these investment fund rebates are annual payments and are therefore taxable against income tax.

How will investment fund rebates be taxed?

The investment fund rebates will be taxed at your income tax rates, and your investment provider will deduct this at source. For basic rate tax payers this will satisfy your liability. Higher rate tax payers will need to pay additional tax via your tax return. Non tax payers can reclaim the tax paid.

An example will explain this better:

  • Investment – £100,000
  • Investment fund rebate – 0.75%
  • Taxable rebate – £750
  • Tax deducted at 20% – £150
  • Tax as a percentage of your investment – 0.15%

It should be mentioned that not all of your investment funds will be paying you investment fund rebates. If the funds are ‘clean’ investment classes they will have a reduced charge which removes the necessity for rebates. This tax change will speed up the process of issuing clean investment classes.

What practical steps can you take?

For existing clients we will examine the tax changes at your next Investment Management review. Of course, we will be in touch to discuss this with you in greater depth.

You can make changes to your investment portfolio by switching to clean fund classes, but this needs to be weighed up in the context of your overall portfolio and the possible capital gains tax implications of switching funds.

Watch the video on our free Investment Management guide and video series:

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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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