Tech Talk. Adviser charging

Transcription

1 ADVISER FACTSHEET Tech Talk February 2013 Adviser charging Under RDR the client has two choices on how to pay adviser charges. They can either settle adviser charges directly, or the product/investment provider may facilitate them. This tech talk is concerned with the tax implications of adviser charges being facilitated by a provider and flags up additional issues which should be considered where the product is held under trust. Lastly we provide an overview of VAT in the context of adviser charging. Where adviser charges are being taken from the product it is important that the client and adviser fully understand the impact this has on the tax efficiency and investment performance of the product. Features Cash Stocks and shares Investment bond ISA s Pensions Trusts VAT For professional advisers only

2 Cash There will be no tax implications where adviser charges are settled from cash unless the client has to sell assets to generate the cash. Stocks and shares The sale of stocks and shares to settle adviser charges will be a disposal for capital gains tax purposes. This may be an attractive option where the client s annual exemption is not fully used. An initial adviser charge taken shortly after an investment has been made is unlikely to result in a gain as there is less chance of there being significant growth. Where other disposals are required, care should be taken so as not to exceed the annual exemption of 10,600 (2012/13 tax year). A higher rate taxpayer will pay tax of 28% on any gain where their annual exemption is exceeded. It is worth remembering that where the client might exceed their annual exemption, they could sell an investment which has made a loss so that this can be offset against their other chargeable gains. Investment bond Adviser charges taken from an investment bond will count towards the 5% tax deferred allowance. To avoid a chargeable event gain the 5% cumulative allowance should not be exceeded. Another point worth noting is ensuring sufficient cash is held within the bond, otherwise underlying investments may need to be encashed perhaps at a time when market conditions are not favourable. Care should be taken where both adviser charges and an income for the client are being taken from the bond. ISA s It s important that ISA contribution allowances are maximised. A withdrawal from an ISA cannot be replenished if the maximum contribution has already been made. A disposal of stocks and shares held under an ISA will be exempt from capital gains tax, however settling adviser charges by this method would reduce the amount that could be held in this tax advantaged environment particularly where the maximum has already been contributed. Pensions In general, a registered pension scheme can facilitate a payment to an adviser for advice given to a member of that scheme. This will have no tax implications so long as the advice falls within HMRC s guidelines. The advice can cover fund choice, pension provider, pension taxation, income options in retirement and investment of funds under existing pensions as well as costs for implementation and administration fees covered within the advice. 2

3 For further information see link uk/manuals/rpsmmanual/rpsm htm. Advice charges for services outside HMRC s guidelines may be treated as unauthorised payments and suffer a tax charge. Where adviser charging is facilitated from an investment product such as an investment bond it may be better to take an initial adviser charge before the investment of the client s money into the product. However, an adviser charge paid from a pension scheme after the contribution of the client s money into the product can result in a higher pension fund value than if the client paid the adviser charge directly to the adviser before contributing. This is demonstrated in the following example of a client who has funds of 16,000 that they are considering contributing to a pension scheme and who has an initial adviser charge of 500 to settle. Adviser charge of 500 paid directly by client to adviser Adviser charge of 500 paid by pension scheme to adviser Funds available to client 16,000 16,000 Adviser charge paid by client 500 NIL Net contribution paid to pension scheme Basic rate tax relief reclaimed by pension scheme Adviser charge paid by pension scheme Pension scheme value after tax relief and adviser charge 15,500 16,000 3,875 4,000 NIL ,375 19,500 Higher and additional rate tax relief will have an even greater impact where an adviser charge is paid after investing in the pension fund. For a personal pension transfer, an adviser charge if facilitated by the scheme provider must be taken from the transferred fund. This will have an impact on the growth of the pension fund. Paying a contribution when transferring the pension would preserve the value of the transferred pension whilst the settling of the adviser charge from the pension contribution would benefit from the tax relief uplift. 3

4 Trusts Adviser charging throws up a number of issues where trusts are being used. This largely springs from the fact that a trust comprises a number of different parties. A trust will have a settlor, trustee and beneficiary. Of paramount importance is being clear on who is receiving and benefitting from the advice, as they will ultimately be responsible for paying for it. It may be necessary to split an adviser charge where it s clear that more than one party has received advice. The settlor will be the client in most instances when being advised on the setting up of a trust, say as part of inheritance tax planning, and so be responsible for paying the adviser charge. In the case of advice given in relation to ongoing investment reviews, tax and distribution, the adviser charge will usually be settled by the trustees. Trustees should not use the trust funds to pay for advice relating to the settlor s personal affairs. This could compromise the terms of the trust. Usually a settlor will not be a trust beneficiary to avoid the IHT gift with reservation rules. If the trustees settle advice charges relating to the settlor then the settlor is benefitting from the trust fund and this could infringe the gift with reservation rules jeopardising the tax effectiveness of the trust arrangement. Different tax issues can arise where the settlor pays an adviser charge from their own personal funds but which relates to advice given to the trustees. It could be argued that the settlor is making a further gift to the trustees which will be a transfer of value for IHT purposes. In short, the settlor shouldn t pay for advice given to the trustees and the trustees shouldn t pay for advice given to the settlor. Where adviser charges are settled from trust assets it will be important to know who is responsible for any tax liability that arises from doing so. For example, where the total withdrawals from an investment bond held under a discretionary trust exceed the 5% tax deferred allowance, taking into account withdrawals to settle adviser charges, the UK resident settlor will usually be assessed on the chargeable event gain arising. The importance of knowing the terms of the trust can be demonstrated with the example of a discounted gift trust which is commonly used in conjunction with investment bonds. Though not always, the settlor will frequently receive an income of 5% of the bond premium for up to 20 years. Where this is the case, it will not be possible to settle adviser charges from the bond held under trust without contravening the terms of the trust and triggering a chargeable event. VAT The broad rule on VAT and adviser charging is that general financial advice is taxable whilst intermediation is VAT exempt. In other words liability to VAT will depend on what activity is undertaken by the adviser. The way the adviser charge is taken, up front or over the life of the product, is not relevant in determining whether VAT is due. Exempt intermediation is where there has been customer specific interaction between the adviser and the product provider in relation to the sale of retail investment products to a retail client. A retail investment product as defined by the FSA includes, amongst others, a life policy, personal pension scheme, unit trusts and investment trusts. The adviser must evidence that intermediation has taken place. Evidence of intermediation is not limited to but could include the adviser securing client specific quotations and discussing them with the client and completion of the product application forms. Providing the client with product provider material will not in itself be sufficient to demonstrate intermediation. It must be shown that the client intended to make a purchase of a retail investment product following a recommendation by the adviser. If the client then decides not to progress, the advice should still qualify for VAT exemption as it would fall into the category of an aborted transaction. There is no VAT exemption for an introduction of the client to a discretionary investment management service as this is a taxable service. 4

5 Intermediation with a platform rather than directly with the product provider qualifies for exemption. Evidence and record keeping as has been indicated will be essential. Within their VAT and adviser charging guidance HMRC have detailed a 6 stage process that an adviser would normally follow when entering into arrangements with clients. This can be found using the following link vatfinmanual/vatfin7665.htm Let s look at a scenario with two different outcomes; one where an adviser charge is likely to be VAT exempt and the other where it will be subject to VAT. This scenario with two different outcomes is based on our interpretation of the Personal Finance Society s paper VAT & Adviser Charging under the Professional Direction title revised edition of February It is not intended as a definitive guide to VAT and adviser charging and advisers should seek advice from their own tax advisers when considering the VAT status of their advice services. A client asks an adviser to carry out a financial review of their estate to determine the inheritance tax liability and to recommend ways to mitigate it or provide for it financially. Following a review the adviser recommends a solution involving the use of life assurance bonds written under trust. The adviser selects the product provider and requests written investment bond key features and illustrations. The adviser provides a suitability report to the client with the illustrations. On receiving the report and personal recommendations the client decides to proceed and the adviser arranges the product for the client. As intermediation has taken place the likely VAT position is that the adviser s charge will be VAT exempt. The VAT position would be different if the adviser had produced a report for the client which referred to generic solutions involving investment bonds and trusts. The report contains no specific recommendations for a retail investment product and none are purchased. In this situation intermediation has not taken place so that VAT will be levied on the adviser s charge. The vast majority of adviser charges for initial advice are likely to be VAT exempt. Even if they were not the current VAT threshold is 77,000. Only businesses making taxable supplies exceeding the current registration threshold must register for VAT. Advisers would therefore only need to apply VAT to advice charges where their taxable supplies exceed the VAT threshold. HMRC provides guidance on the VAT status of review and ongoing services. An adviser signing up a client to a periodic review service at the time the client buys their exempt financial products will be VAT exempt so long as the review service is an ancillary or minor part of the exempt supply of intermediation. Generally HMRC will regard a periodic review (usually annual) to check asset allocation and risk profile contracted for at the same time as the initial intermediation as being ancillary to the principle supply of intermediate exemption. Where the review/ongoing services aren t transacted as part of the original intermediation supply so that they are a supply in their own right, the VAT treatment will depend on the nature of the services being supplied. 5

6 Summary Investment and platform providers have a number of solutions to take adviser charges from products where the client does not wish to pay them directly. Clients and advisers should be aware of the tax implications of doing so, ensuring the client is not left with a surprise and unwanted tax bill and that the tax effectiveness of any trust arrangement is not jeopardised. Whether the adviser charge will be subject to VAT increasing the cost to the client will depend on what is actually carried out by the adviser and the intentions of the client. Tracyann Kneen Tax and Trusts Specialist Technical Support Unit Further information Please do not hesitate to contact the Technical Support Unit with any further queries on: Tax and Trust Technical Support: taxtrust.techsupport@jameshay.co.uk Please note that every care has been taken to ensure that the information provided in this article is correct and in accordance with our understanding of current law and HM Revenue & Customs practice. You should note however, that James Hay cannot take upon itself the role of an individual taxation adviser and independent confirmation should be obtained before acting or refraining from acting upon the information given. The law and HM Revenue Customs practice are subject to change. James Hay Partnership is the trading name of James Hay Insurance Company Limited (JHIC) (registered in Jersey number 77318); IPS Pensions Limited (IPS) (registered in England number ); James Hay Administration Company Limited (JHAC) (registered in England number ); James Hay Pension Trustees Limited (JHPT) (registered in England number ); James Hay Wrap Managers Limited (JHWM) (registered in England number ); James Hay Wrap Nominee Company Limited (JHWNC) (registered in England number ); PAL Trustees Limited (PAL) (registered in England number ); Santhouse Pensioneer Trustee Company Limited (SPTCL) (registered in England number ); Sarum Trustees Limited (SarumTL) (registered in England number ); Sealgrove Trustees Limited (STL) (registered in England number ); The IPS Partnership Plc (IPS Plc) (registered in England number ); Union Pension Trustees Limited (UPT) (registered in England number ) and Union Pensions Trustees (London) Limited (UPTL) (registered in England number ). JHIC has its registered office at 15 Union Street, St Helier, Jersey, JE2 3RF. IPS, JHAC, JHPT, JHWM, JHWNC, SPTCL, SarumTL and IPS Plc have their registered office at Trinity House, Buckingway Business Park, Anderson Road, Swavesey, Cambs CB24 4UQ. PAL, STL and UPT have their registered office at Dunn s House, St Paul s Road, Salisbury, SP2 7BF. UPTL has its registered office at Boundary House, Charterhouse Street, London, EC1M 6HR. JHIC is regulated by the Jersey Financial Services Commission and JHAC, JHWM, IPS and IPS Plc are authorised and regulated by the Financial Services Authority. The provision of Small Self Administered Schemes (SSAS) and trustee and/or administration services for SSAS are not regulated by the FSA. Therefore, IPS and IPS Plc are not regulated by the FSA in relation to these schemes or services.(02/13) JHSTT 01 FEB13 GDF 6