Scottish life intl points out tax avoidance issues surrounding rebates
Intermediaries who rebate commission on offshore bonds could be putting their clients in line for a tax bill from HM Revenue & Customs (HMRC).
Scottish Life International (SLI) is warning IFAs that HMRC may judge such an action to be a tax avoidance scheme, especially if they are putting clients into cash bonds and then cashing them in very shortly afterwards.
While HMRC allows for commission to be rebated back to the client tax free, Gerry Brown, technical manager at SLI, warned against abusing the spirit of this. He noted in such cases HMRC would be likely to charge a 15% tax on the rebated commission and on the investment growth in the bond after initial fees were taken.
As an example, if a client has £100,000 to invest and there is up to 5% initial commission, the client has a 95%, or £95,000 allocation. If the adviser rebates 4% or £4,000 to the client, this goes tax-free to the investor.
If after 15 months the bond value has grown to £98,000, and is surrendered, the total received by the investor from this, and rebated commission is £102,000.
Under HMRC's relevant statement of practice, 4/97, the chargeable event is worked out on the basis of a premium of £100,000. As the client has received £98,000 on bond surrender there is no chargeable event gain or tax. So the investor has made a tax-free profit of £2,000 over a 15-month period.
Brown believes this deliberate practice has been growing and cash type bonds are preferred because encashing equities over short time periods carries too much risk.
Brendan Harper, technical manager at Friends Provident International (FPI), said: "We would not enter into schemes like that. It is too risky as you cannot rely on statement of practice. There is a danger clients are entering into something that does not work."
HMRC's policy is outlined in its Revenue & Customs Statement of Practice SP 4/97. This states: "In general, ordinary retail customers purchasing goods, investment or services at arm's length will not be liable to income or capital gains tax in respect of any commission, discounts or cashbacks received by them."
However, Brown pointed out the statement also contained an important qualification, the key part being: "The legal analysis, and consequent tax treatment, will not necessarily follow that outlined in the statement where the receipts or payments in question form part of a scheme of tax avoidance.
"Similarly, the treatment outlined in the statement may not apply where the recipient of a commission, cash back or other benefit is party to an arrangement under which the purchase price for goods, investment or services has been increased."
International Investment sought a comment from HMRC but a spokesman said it did not comment on tax avoidance issues.
SLI and FPI warn of a dividing line between rebating commission on offshore bonds and tax avoidance.
Expect 15% tax charge on rebated commission and on portfolio investment growth, after initial charge paid, for anyone HMRC thinks has committed tax avoidance.
Offshore bonds invested mainly in cash are particular worry, according to SLI.
Partner Insight: Introducing the Architas education series for clients.
'Fewer than 1% of firms PROD-compliant' - Rory Percival
'Left holding the can'
'VCTs and EIS compared' panel
Letter to Women and Equalities Committee