A new tax to pay on your investments

From next week investors will have to start paying more tax.

Investors will soon have a new tax to worry about. The so-called “Discount Tax” will apply to any rebate payments they receive.

It will mainly affect fund supermarkets and will apply to payments made to investors in a Collective Investment Scheme, insurance policy or other investment product which are paid by fund managers, fund platforms, advisers, or any other person acting as an intermediary between the fund and the investor.

There is no minimum or maximum amount which needs to be invested before the tax sets in. Critics have called it an anti-competitive “second tax on income”.

But investments within an ISA or a SIPP (self-invested personal pension) will be protected from the extra tax.

HMRC confirmed the changes yesterday and the new tax will come into force on the 6th April, giving fund supermarkets only a week to prepare for the change.

The Discount Tax

If investors are paid rebates on their investments, either through cash or additional fund units after the new tax year begins, these will contribute towards their taxable income, HMRC has said.

This has not happened before, but HMRC will only begin taxing people from 6th April and won’t be collecting payments retrospectively.

Under the new rules these payments will be taxed at basic rate and taken from any rebates paid. Higher-rate taxpayers will need to declare this income through a self-assessment tax return.

Loyalty bonuses

Rebates, or loyalty bonuses as they’re also known, cut costs for investors and they are used by fund supermarkets to make the cost of investment cheaper.  

Investors are paid the rebate by the fund supermarket they’ve used. This comes from the money investment companies, which operate the funds which you can invest in through the fund supermarkets, pay in advice commission.

The money is then passed onto the investor in the form of the rebate, but the amount varies between different companies. You can read more about the cheapest places to invest in our article The cheapest investment platforms - rivals to Hargreaves Lansdown.

These payments are also known as trail commission. The Financial Services Authority (FSA) is currently in talks, looking at whether to ban these payments.

As investors and fund supermarkets only have a week before this tax will start to apply, HMRC has said it’ll accept an estimated figure of the tax owed for 2013.

Anti-competitive tax

Hargreaves Lansdown, one of the largest fund supermarkets in the UK, has said the tax is extremely disappointing news for all concerned and is anti-competitive.

Although the amounts at stake are relatively small and come to around £10 per year for the average investor, it argues that investors need discounts as these are key to a competitive economy.

It also warns that HMRC could move onto taxing cashback schemes in the UK, which could prove a massive blow to websites such as Top Cashback and Quidco.

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