Revenue introduces a shock tax on fund rebates

Investment groups were caught out this week after a surprise announcement from HM Revenue & Customs that it will tax rebate payments or loyalty bonuses.

These are handouts made by platforms – the online supermarkets of investment funds – to investors, in the form of discounts or extra units in funds.

The move will hit the attractiveness of some platforms while the timing comes 12 months ahead of an expected ban of the payouts by the City watchdog. That would bring the payments in line with the recently introduced ban on commission to advisers.

Alistair Cunningham, of Wingate Financial Planning of Caterham, Surrey, said the timing will lead to confusion. "The announcement on Monday came as a surprise because of the very short timescales – giving the industry less than a fortnight to act," he pointed out.

The Financial Services Authority has been pushing through a move towards so-called "clean" funds, which have transparent charges and no commissions. But the regulator didn't impose the same restrictions on platforms, allowing them to continue to make rebates to investors.

"Our analysis suggested that the cost of many funds was more if we invested in the 'clean' version, rather than the commission-paying version with commission rebated, so we'd kept people in the commission-paying funds," said Mr Cunningham. "The position is now reversed, but causes complications as it may be that switching funds will incur capital-gains tax."

However, Ben Yearsley, head of investment research at Charles Stanley Direct, said: "HMRC's decision will hasten the move towards commission-free, clean-priced funds."

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