Rebates to investors

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HMRC issued a business brief 04/13 yesterday which addresses the issue of rebates (periodic payments) to investors. While primarily focused on retail investors it will impact all funds and UK managers.

The thrust of the brief is twofold. First, it makes it clear that a UK resident investor is taxable on the ongoing rebate whether paid in cash or additional fund units. Secondly, it concludes that ongoing rebates paid by a UK based manager or intermediary carry the obligation for the payor to withhold UK basic rate income tax from the payment (or to treat the value of additional units as an amount paid net of tax).

The changes are effective from 6 April 2013 so leaving very little time for managers to react. The changes are not retrospective.

HMRC had previously commented on rebates in the Statement of Practice on the Investment Manager exemption without raising the question of withholding tax.

A summary of the changes are given below however, the precise impact will have to be considered on a case by case basis.

Managers and Intermediaries

1. Payments by or through a UK based manager or intermediary have the potential to require the payor to deduct basic rate income tax from the rebate and account for that to HMRC.

  • There are certain exempt payments. The main ones being payments by a company to a UK resident company or a payment to a treaty resident that has been approved by HMRC for gross payment.
  • It does not matter where the underlying fund is situated as it is the paying entity and the nature of the payment that is relevant. The obligation to withhold also applies to a manager established as an LLP.

2. Value given by the allocation of additional units is still income. If the allocation is made by a UK payor in the form of credited units then the value of the units credited will be treated as net of the tax that should have been deducted.

3. Share classes that charge reduced fees do not seem to be impacted.

4. Payments of commission to a third party marketer would usually not be an annual payment so can still be paid gross.


1. A payment directly from a fund to an investor is either a distribution or withdrawal of capital (depending on the legal mechanics of how the fund makes the payment), so it is either income or a capital gain in the hands of the investor. The offshore fund rules could be relevant to the amount of tax charged. If the paying fund is in the UK and it is a distribution, income tax might currently be required to be withheld eg a bond fund although this treatment itself is under view following the budget.

2. Payments that represent a return of initial fees when buying into a fund would still seem to be an adjustment to the capital cost of the units. As a single payment it would also not seem to be a payment from which income tax has to be withheld.

3. Payment by anyone other than the fund is a receipt taxable on the investor at his marginal tax rate as an annual payment. Anyone else here seems to include the manager, intermediary or any other platform provider


The arrangements that managers have with investors will need to be reviewed to assess how this new approach will apply. Other taxes such as VAT and the interaction with any employment income charge will also have to be considered. That said there may be a couple of ways that the impact on the manager can be limited.

HMRC are looking for the income tax to be deducted and accounted for to them in respect of payments from 6 April 2013. In view of the short time frame transitional rules will apply until the end of 2013.

Neil Oliver
27 March 2013

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