I agree the initial question has to be - is this income or capital for a trust law perspective, regardless of the tax treatment - and I think I agree that it is probably capital.
The portfolio consists of several mutual funds that have been ‘stock-picked’ by the financial adviser (on the basis that they will produce an income for the life tenant whilst maintaining the capital for the capital beneficiaries) and the trustees have accepted this advice and invested the funds accordingly (so, no discretionary fund management to avoid being an FI for FATCA!).
The selected mutual funds are held and administered by an investment platform. The platform applies monthly platform charges (calculated as a percentage of the total value of investments) which are funded by the monthly sale of units.
The rebates are “payments back to the investor as part of the cost of investing in particular funds based on what’s been agreed with the fund manager”. These are paid in cash initially and credited to a Rebate Account. But, cash rebates are no longer allowed so they have to be used to buy units - which then becomes a unit rebate.
So each month, there is a sale of existing units to fund the platform charges and a purchase of units if there is sufficient cash in the Rebate Account.
HMRC’s view is that these rebates are rebates of commission because the fund manager is deducting them from business income as a business expense - so they are subject to income tax.
Looking at it (and I have asked the IFA and platform for clarification of this) it appears that the rebates are either (1) refunds of the platform charge; or (2) refunds of the underlying costs of investing (presumably taken into account in the pricing); or (3) refunds of trail commission.
If (1), then the treatment in the trust accounts would be to credit the Capital Account with the net Cash Rebate figure and then when new units are purchased, the cash rebate used to fund the purchase becomes the base cost.
If (2), then presumably the treatment would be as you say to reduce the base cost of the initial investments by the net amount when the Cash Rebate comes in - though how would I apply this across the various funds since the cash rebate isn’t broken down by fund? - and then to account for the new units as in (1)
If (3), then I have more of a headache because the beneficiary is then adding to the trust fund and I do not know if it can be separated out retrospectively
On top of all the above, there are sales every month so I will need to match the purchases against them first (30 day rule) which is making the CGT calculations very laborious. The platform does not produce CGT reports, only transaction listings - though given the issues it is probably just as well.
And, as you rightly point out, all of the above relates to some very tiny amounts.
If is frustrating because the investments appear to be doing what the trustees want them to do and if it wasn’t for these rebates, all would be good! I will investigate if they can be dropped…
Thank you for the replies. I am certain others must have come across this issue to date…
Colette Gill