Clean Share Classes, Dirty Tricks and Taxes

Platforms are back in the news after the HMRC announced last week  that rebates from fund managers to clients will be liable to income tax. The timing couldn’t be any worse, given that we are coming to the end of the tax year.  Bed and ISA just got harder!

First, let’s remind ourselves of what we know already;

1. The regulator has plans to ban cash rebates  on new business on platforms staring from Jan 2014. This is expected to cut across adviser and execution-only platforms as well as life offices. It ‘s expected that unit rebate to investors will be allowed to continue.
2. Rumour has it that the regulator plans to  ban cash rebates on legacy business held on platforms too, starting from 2016. This is bound to be a game changer especially for those with large legacy business

So while the FSA (oh sorry, replace S with C) were twiddling their thumbs as they do, the HMRC in their infinite wisdom decided to do their dirty work for them! It unfolded plans to kill rebates – cash and unit  – completely! Slowly, but surely.

If you want to hear it from the horse’s mouth, you can see the HMRC’s guide on the subject here. Bye

If you prefer something a little more humane  and  some opinion, then keep reading.

Starting from 6 April 2013, client will be liable for Income tax on fund rebates on unwrapped investments held on platforms.

1. ISAs and Pensions are not affected as long as the rebates go back into the wrapper.
2. Onshore Investment Bonds are fine too and tax is payable in the normal way in event of a chargeable gain.
3. General Investment Accounts – OEICs and Unit Trust will be affected and clients will be liable for Income Tax on rebates
4. Basic rate tax is deducted at source by the platform or fund manager and higher/additional rate tax payers due through their Self Assessment in the normal way.

Should I move clients into Clean Shares!

Yes and no! Clear? No? Yes?  OK.  Here’s the thing. It is worth considering moving clients with investments in General Investment Accounts into clean shares classes.  However this is not all that straight forward.

First, platforms vary significantly in where they are with offering clean shares. Here’s how they stand as  of January 2013

Note: Table adapted from Fundweb article by Sam McDonald dated 24 Jan 2013

And if you think that platforms will be failing over themselves to add more clean share classes, then you are just as naïve as I am. In fact, the two platforms Standard Life and Skandia are trying to pull some dirty tricks by seeking ‘special clean share classes’ from fund managers. How exactly are they going to do this? Well, one option of for fund managers to create ‘special’ share classes for these providers.

And who says other equally big players wouldn’t want it on the act? Imagine fund grounds having to introduce ‘special’ share classes for every platformman and his dog?

And imagine in-specie transfer from one platform to the other, with each offering its own ‘special’ clean share classes? What you get is mayhem! It’s official, clean just got dirtier!

Still worth moving clients to cleans shares though. Even if price is your main concern, an equivalent clean share class will need to cost 20% or more than the bundled share classes less rebate  (and yes there are a few of those) for it to make any sense keeping client in bundled share classes. And even then, other factors such as ease of administration for the adviser and additional burden of including this in clients’ tax returns  are likely to trump the cost argument. So really  the answer appears to be  clean share  class going forward.

This is probably easier if you are running model portfolios, in which case, you check with the platform provider if they have your funds available in clean share classes. If not, when do they expect to?

In the meantime, TISA is lobbying the HMRC to delay implementation,  after revealing  that the changes will cost platforms £15m! With the deadline just a week away, let us all hold our breath and wish TISA goodluck. They are going to need it!

Abraham Okusanya

Director

Abraham is the founder of FinalytiQ, a research consultancy for platforms, asset managers, and advisory firms. Recognised as one of the country’s leading experts in retirement income, platforms and investment propositions, Abraham has authored several papers on these subjects and delivered talks to the Personal Finance Society, The FCA and several conferences across the country.

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