I have a qualifying IIP trust that has invested recently in some income generating mutual funds. Each month the platform calculates the rebate due in relation to these funds and pays the amount into a specific cash account called the Rebate Account. Because cash rebates are no longer allowed, when the Rebate Account reaches a certain level the cash is then used to purchase new units in the funds and these appear on statements as ‘unit rebates’. The ‘cash rebates’ (as opposed to the unit rebates) are subject to income tax deducted at source. Thus the Rebate Account shows cash going in, income tax being deducted on that cash and then cash being used to purchase new units.
I am unclear as to how these rebates need to be accounted for in the IIP trust accounts. The platform service advises that the rebates are payments back to the investor as part of the cost of investing based on the agreement between the fund manager and the platform/adviser and are thus capital. However, HMRC is saying they are effectively commission being passed on and thus income.
If income, there is the problem that the platform is using the life tenant’s rebate income to purchase units on behalf of the life tenant and mixing them in with the rest of the trust fund and all the issues that stem from that.
If capital, then presumably the life tenant needs to be given capital cash to match the ‘cash rebate’ amount they are being taxed on? And, presumably the base cost of the new units purchased would be the amount of cash rebate used to fund the purchase? Or would these be treated as a bonus issue? And, indeed should the cash rebate be used to reduce the base cost of the initial investments in the fund?? Or possibly not because cash rebates are not in fact allowed!
Colette Gill