As expected, Gordon Brown has all but closed the door on the year-and-a-day cash investment schemes in his recent Budget, but the fallout may be much greater than was originally estimated.
The investment schemes in question were where the client return was made up largely by the rebate of commission from portfolio bonds that were invested in cash. The bond would carry an initial charge to cover the commission in the form of a reduced allocation rate – say 95%. At the end of a 12-month period the client saw a return of capital from their bond with the addition of interest earned in the cash fund. The chargeable gain at the end of the year was at or near zero. But since the commission rebate was not taxable, the yield over 1-yr was highly attractive.
In the wording of the announcement, however, the knife seems to have cut deeper. It would appear that the Revenue will seek to tax commission rebates on all investment bonds surrendered in the first three years depending on the size of the original investment. This means that all bonds and not just those being used in the year-and-a-day cash schemes will be affected.
No doubt the industry will react by changes in policy wordings – the most likely would be to move to factory gate pricing. The factory gate pricing approach separates the manufacturing costs (product provider cost) and the distributor costs (adviser costs). The manufacturing cost is set by the provider, and the advice charged determined by the adviser with agreement from the customer (hence factory gate pricing becoming known as customer agreed remuneration).
With many companies moving to a factory gate pricing basis, this may have little impact on their product development plans. It may, though, accelerate the need for IFAs relying on initial commission to re-examine the way in which they are remunerated by their clients.
The Budget announcements are still only just that and until the Finance Bill is published and the Bill enacted, we really cannot be certain of what action is appropriate.
Looking back at the Budget predictions, I do not think anyone foresaw the linking of factory gate pricing and anti-avoidance tax proposals!
Richard Leeson is international relations manager at Prudential.
The views expressed are those of the author and not those of the company he represents.IFAonline
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