Market-leading broker Hargreaves Lansdown has accused the UK Government of hitting small savers with a "discount tax" after HM Revenue & Customs said cash rebates on investment funds would be taxable from next week.
But other providers welcomed the move by HMRC to accelerate the industry's move to "clean" fund investments, where typically a 1.5% annual charge is halved to 0.5%, with a fee charged on top for using the platform.
The Financial Services Authority is set to rule next month on the current opaque system of built-in commissions, now outlawed in financial advice, but not where the customer buys directly. Providers can currently charge 1.5% and "give" the customer a 0.25% discount or rebate, while still making a profit of 0.5% – or more for the big players who can cut the best deals with fund managers.
Now HMRC has said the rebate is taxable, and higher-rate payers must declare it on their tax form. The industry had expected no change in the status quo for another year.
Hargreaves Lansdown said the Government was "seeking to tax small savers and investors". Chief executive Ian Gorham said: "The Government may have set a precedent in taxing such loyalty schemes and savvy shoppers could well be next, with multi-buys, cash-back credit cards and cash-back websites all possible targets in the future." But Mr Gorham admitted: "Hargreaves Lansdown will, in due course, be able to offer clients access to funds that have no commission built into charges. We are awaiting clarity from the FSA on their 'platform rules' before implementing this change."
But not everyone has waited for the FSA. Patrick Mill, chief executive at Dundee-based ATS, said: "Alliance Trust Savings decided, last year, to launch a range of clean share class funds, anticipating transparency would become increasingly important to consumers. Providers who have yet to adopt clean share class funds may face some difficult questions from advisers and clients keen to avoid an unexpected tax charge."
Billy Mackay, marketing director at Sipp and investments platform AJ Bell, said: "I am not entirely convinced about the suggestion this is a discount tax.
"What matters most to the end investor is the total cost of ownership after you allow for all of the costs of using the investment platform and the underlying fund."
Derek Stewart, at SAM Wealth in Glasgow, welcomed the spirit of the change but said it "smacks of headline grabbing rather than common sense". He said HMRC was trying to bully fund managers into speeding up what were complex changes to clean share classes.
Stuart Welch, chief executive at TD Direct Investing, said: "The reality is that commission rebates on funds are merely giving investors their own money back, in most cases. The clear benefit of clean funds is that they do not include commission in the first place, so less of the capital investment gets eaten up by additional charges."
TD calculates that a £50,000 investment growing at 6% a year for 20 years will return £20,000 more with a 0.75% a year charge than with a 1.5% charge.
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