HMRC's new tax on fund rebates sounds like bad news, but it will probably have a positive consequence.
HMRC announced a new tax last month. This new ‘discount tax’ applies to any rebates you might receive from a fund management company or an investment platform. You can read more about this new tax in A new tax to pay on your investments.
Now it’s true that new taxes are rarely welcome, and in some ways this new tax is a bit of a pain, especially if you have investments that you hold outside an ISA or pension wrapper (the tax won’t apply to investments in ISAs or pensions).
But the good news is that the new tax will probably lead to greater clarity for investors when it comes to the charges they pay for investment funds.
How things work now
Let’s look at how things work now – in particular, for investments that aren’t made via financial advisers. In other words, you make the investment on your own via an ‘execution only’ investment platform.
As things stand, most private investors normally pay around 1.5% a year to a fund management company, such as Jupiter, for a typical unit trust or OEIC.
The fund management company then normally pays some of that money back to the investment platform on which the initial investment was made – for example, Hargreaves Lansdown. The platform then usually rebates some or all of that money back to the customer, either in cash or in extra units in the fund. It’s these rebates which will be taxed.
Some platforms also impose separate charges on their customers.
Thanks to this tax decision, all the fund management companies will almost certainly speed up plans to switch to ‘clean’ share classes. This means that you’ll pay a lower annual charge to the fund management company but the fund management companies won’t pay any rebates to you or the investment platform. The annual charge might be around 0.75%.
Now, you might think this will make little difference. If you don’t get any rebate, but you pay a lower charge, you’ll be in roughly the same situation financially, right?
But one thing will change. There will be greater transparency on what charges you’re paying. And if there’s greater transparency, it will be harder for the all the different investment companies to play clever games and take your money without you even realising.
Clarity
Hopefully this greater clarity will also spread across to the charges you pay to the fund management companies. Sadly, the annual management charge (AMC) that is normally quoted by the fund management companies normally won’t include all the costs that you’ll end up paying.
A different measure, the Total Expense Ratio (TER), is better but it still doesn’t include all the costs such as dealing commissions, stamp duty or foreign exchange costs.
Thankfully, we’re now beginning to see movement in this area too. The True and Fair Campaign has been working hard for the last year pushing for greater clarity in fund charging, and the campaign also plans to soon launch a calculator where you can compare the true level of charges levied by individual funds.
What’s more, the new boss of the Investment Management Association (IMA), Daniel Godfrey, has also proposed significant changes in a blog post. He wants us to focus on a fund’s historic costs over the last year instead of trying to estimate what the costs will be in the future. If the industry does this, you’ll be able to focus on a precise accurate figure that should give you a pretty good feel for what a fund will charge in the years ahead.
Let’s just hope that this push for greater clarity across the board is sustained. Greater clarity should eventually mean lower charges and that will mean better investment returns for all of us.
> Answer one of our Lovemoney surveys and you could win a brand new iPad!
More on investing:
The cheapest investment platforms – rivals to Hargreaves Lansdown
Nutmeg: An alternative way to invest your ISA