Investment platforms have become a major part of the investment fund landscape in recent years. The five largest platforms now administer over £140 billion and account for nearly half of all new private investor fund purchases, according to the Investment Management Association.
There are two main ways in which platforms operate at present.
- The rebate approach The platform uses a series of funds (e.g. ABC Fund Class A), which have management charges loaded to provide fees to the platform. Any surplus fee is rebated to the investor, or used to provide additional units/shares.
- The clean price approach The platform uses a (lower charging) series of funds (e.g. ABC Fund Class Z), which make no provision for fee payments to the platform. The investor is then charged a platform fee, typically deducted from their cash account.
Shortly before the end of the tax year, HM Revenue & Customs (HMRC) made a surprise announcement that any amount the investor received under option A, whether as cash or extra fund shares/units, would be treated as taxable income from 2013/14 onwards. Until HMRC’s statement, everyone – including, it seemed, HMRC – thought rebates were tax-free.
Just over a month after the HMRC move the new financial regulator, the Financial Conduct Authority (FCA), released a paper setting out how platforms would operate in the future. This was the product of long-running consultations by its predecessor (the Financial Services Authority [FSA]) and, as widely anticipated, ruled that ultimately platforms should not pay cash rebates to investors. Unsurprisingly, the FCA highlighted HMRC’s new tax insight as a supporting reason to abandon rebates.
A switch to clean price funds will mean that fund holdings in a rebate-based series will have to be converted to the clean price series by 5 April 2016. If you are affected, there should be no tax issues on conversion: HMRC accepts that changing between two different series of shares/units within the same fund (e.g. from class A to class Z) neither gives rise to a stamp duty charge nor to a capital gains tax liability.