Income Tax liability on Commision paid to IFA
Discussion
I have a 10yr investment stocks bond with Prudential that I have recently transferred to an IFA upon recommendation by my Bank (with whom it was started through) who due, to the RDR regs decided to make all their in-house IFAs redundant and move on any existing business to an independent IFA that they recommended.
The new IFA said that as the bond was started pre 31/12/2012 that they could earn commission off it, if I agreed to transfer it to their management and that I would then get free advice every year on the bond, off the back of the commission paid to them. I had the choice to not appoint anybody but then the commission would be kept by Prudential and any advice would be from the Prudential and therefore would be tied to their products, whereas the IFAs advice was independent. At the time I was therefore under the very clear impression that it would cost me nothing going forward and so I agreed.
So the problem is that the IFA have just written to me to say that they have since taken advice from HMRC and have been advised that he commission paid to them will be treated as income in my hands and therefore subject to income tax. So they intend to pay 20% tax at source out of the commission paid to them, but as a higher rate tax payer I will be liable to declare the remainder to HMRC on my tax return and pay the additional rate of tax.
An example is given where an investment earns them £500 in commission, upon which they will pay £100 to HMRC in lieu of basic rate tax, leaving a 40% tax payer having to pay a further £100 in tax direct to HMRC via their tax return.
My question is can this be right? I will already have a tax liability on any growth in value at the end of the term, but how can I be taxed on the commission paid to them. I see the base logic that the free advice it gets me is in effect a "benefit in kind", but the problem in my eyes is that commission they receive is based upon the whole investment, and aside from the relatively small amount of "interest" it has earnt so far, the majority of the value was in fact hard cash that I invested having already paid income tax on it.
Surely therefore I am being asked to pay income tax on a commission paid on cash which I have already paid income tax upon, AND income tax on the commission paid on the growth (as commission is paid to them on the full bond value) which I will then pay income tax again on when it matures!
If the income tax liability is correct then I wouldn't have allowed the IFA to take a commission and would have opted to pay for any advice as and when taken or gone with the Prudential tied, but free option.
Can anybody clarify if this position on the income tax liability is actually correct? The sage advice of any resident PH Tax Gurus would be most welcome ahead of me calling them tomorrow to complain and explain my argument.
Many thanks in advance
Adam
The new IFA said that as the bond was started pre 31/12/2012 that they could earn commission off it, if I agreed to transfer it to their management and that I would then get free advice every year on the bond, off the back of the commission paid to them. I had the choice to not appoint anybody but then the commission would be kept by Prudential and any advice would be from the Prudential and therefore would be tied to their products, whereas the IFAs advice was independent. At the time I was therefore under the very clear impression that it would cost me nothing going forward and so I agreed.
So the problem is that the IFA have just written to me to say that they have since taken advice from HMRC and have been advised that he commission paid to them will be treated as income in my hands and therefore subject to income tax. So they intend to pay 20% tax at source out of the commission paid to them, but as a higher rate tax payer I will be liable to declare the remainder to HMRC on my tax return and pay the additional rate of tax.
An example is given where an investment earns them £500 in commission, upon which they will pay £100 to HMRC in lieu of basic rate tax, leaving a 40% tax payer having to pay a further £100 in tax direct to HMRC via their tax return.
My question is can this be right? I will already have a tax liability on any growth in value at the end of the term, but how can I be taxed on the commission paid to them. I see the base logic that the free advice it gets me is in effect a "benefit in kind", but the problem in my eyes is that commission they receive is based upon the whole investment, and aside from the relatively small amount of "interest" it has earnt so far, the majority of the value was in fact hard cash that I invested having already paid income tax on it.
Surely therefore I am being asked to pay income tax on a commission paid on cash which I have already paid income tax upon, AND income tax on the commission paid on the growth (as commission is paid to them on the full bond value) which I will then pay income tax again on when it matures!
If the income tax liability is correct then I wouldn't have allowed the IFA to take a commission and would have opted to pay for any advice as and when taken or gone with the Prudential tied, but free option.
Can anybody clarify if this position on the income tax liability is actually correct? The sage advice of any resident PH Tax Gurus would be most welcome ahead of me calling them tomorrow to complain and explain my argument.
Many thanks in advance
Adam
Edited by AdamV12V on Thursday 7th November 22:10
Makes sense to me, but I am NOT an accountant or financially qualified in any way.
You get paid from your job, and taxed on it. Reasonable. You decide to invest that money into some instrument.
It makes a small profit. You could walk away with that and you would be taxed on it. Instead, you pay the IFA with that money. Still taxable.
In that way, it's a replacement for the tax on (some of the) growth at the end.
Whether you should have been sold the deal in this way is another matter. I also don't know why it's not capital gains rather than income, but that's probably just my lack of knowledge.
You get paid from your job, and taxed on it. Reasonable. You decide to invest that money into some instrument.
It makes a small profit. You could walk away with that and you would be taxed on it. Instead, you pay the IFA with that money. Still taxable.
In that way, it's a replacement for the tax on (some of the) growth at the end.
Whether you should have been sold the deal in this way is another matter. I also don't know why it's not capital gains rather than income, but that's probably just my lack of knowledge.
Most IFA's now have to be paid a fee rather than commission on the sale - mine is an annual fee based on a percentage of the fund value. The fees are normally released from income/growth in the underlying investment and paid to the IFA.
In your case, it appears any growth that is "released" is taxable immediately rather than on maturity - this should have been highlighted when you made the investment.
The arrangement is set-up this way so you are not paying the fees from personal funds and the IFA is guaranteed his payment rather than issuing an invoice and chasing for payment, though this should also be given as an option.
David
In your case, it appears any growth that is "released" is taxable immediately rather than on maturity - this should have been highlighted when you made the investment.
The arrangement is set-up this way so you are not paying the fees from personal funds and the IFA is guaranteed his payment rather than issuing an invoice and chasing for payment, though this should also be given as an option.
David
sumo69 said:
Most IFA's now have to be paid a fee rather than commission on the sale - mine is an annual fee based on a percentage of the fund value. The fees are normally released from income/growth in the underlying investment and paid to the IFA.
In your case, it appears any growth that is "released" is taxable immediately rather than on maturity - this should have been highlighted when you made the investment.
The arrangement is set-up this way so you are not paying the fees from personal funds and the IFA is guaranteed his payment rather than issuing an invoice and chasing for payment, though this should also be given as an option.
David
No not quite, I have been told that there is tax on the growth and that is payable at the end (via a top slicing calculation). My IFA takes a 0.5% annual commission on the current value of the whole bond.In your case, it appears any growth that is "released" is taxable immediately rather than on maturity - this should have been highlighted when you made the investment.
The arrangement is set-up this way so you are not paying the fees from personal funds and the IFA is guaranteed his payment rather than issuing an invoice and chasing for payment, though this should also be given as an option.
David
This income tax liability relates specifically to the commission paid to the IFA. It would seem that HMRC are classing this as my income as in effect I am getting free financial advice in relation to the bond. I guess the only way HMRC can put a value on this free advice (which is a benefit to me) is to look at the value paid for it - i.e. the commission. Therefore the commission is in effect been seen as income to me.
Just doesn't make sense to me - I have previously paid income tax on the cash I invested at the beginning of the bond and I will pay income tax on the growth upon maturity of the bond. I am now being told I have a liability to pay income tax on the commission paid to the IFA! This is all because of the new RDR regs which change the way IFAs can take commission.
Surely this cant be right? I have already called the IFA (on voicemail grrrr) and asked them to call me back to explain, and stated that I am not happy about it.
Edited by AdamV12V on Friday 8th November 11:45
You are allowed 5% per annum income from these type of bonds without tax liability.
If the IFA takes an annual fee, this is taken from your annual allowance - so if you are already taking your 5% as income & the IFA takes a 1% fee, this takes you over the 5% allowance & will be liable to tax.
The solution will be to lower your income - asuming you are happy with the IFA's service, ask the IFA to take a lower annual fee, or look after the bond yourself.
If the IFA takes an annual fee, this is taken from your annual allowance - so if you are already taking your 5% as income & the IFA takes a 1% fee, this takes you over the 5% allowance & will be liable to tax.
The solution will be to lower your income - asuming you are happy with the IFA's service, ask the IFA to take a lower annual fee, or look after the bond yourself.
From the Pru IFA website:
Ongoing Adviser Charges and Ad-hoc
Adviser Charges deducted from within the
Plan are treated as withdrawals for tax
purposes, may be subject to transaction
delays, and may impact on the level of
regular withdrawals you can take from the
Plan.
Income tax
You can currently withdraw up to 5%
each year of your total Premium for up to
20 years without any immediate tax
liability. Any Ongoing or Ad-hoc Adviser
Charges taken from your Plan will be
included within this 5% allowance. This
allowance rolls over to the following year
if it’s not used.
However there may be income tax to
pay when:
> your plan ends on death,
> you cash in all or part of your plan,
> you withdraw more than the 5% a year
tax deferred allowance from your plan,
or
> you transfer the ownership of the plan.
Gains from your plan may mean that
you lose some or all of your entitlement to
personal allowances and certain tax credits.
IIRC ( & its been a while since I dealt with onshore stuff), The 5% annual tax deferred allowance is in relation to basic rate tax payers only. Higher rate tax payers will have a liability for the difference between basic & higher rate tax on the withdrawals.
The Adviser fee is classed as a withdrawal (which it is- units are encashed & paid from the Bond), & the withdrawal is therefore liable to tax.
OP, the IFA has f
ked up there - this should have been expained to you, you can call the Pru & request that the Adviser charging be stopped.
Ongoing Adviser Charges and Ad-hoc
Adviser Charges deducted from within the
Plan are treated as withdrawals for tax
purposes, may be subject to transaction
delays, and may impact on the level of
regular withdrawals you can take from the
Plan.
Income tax
You can currently withdraw up to 5%
each year of your total Premium for up to
20 years without any immediate tax
liability. Any Ongoing or Ad-hoc Adviser
Charges taken from your Plan will be
included within this 5% allowance. This
allowance rolls over to the following year
if it’s not used.
However there may be income tax to
pay when:
> your plan ends on death,
> you cash in all or part of your plan,
> you withdraw more than the 5% a year
tax deferred allowance from your plan,
or
> you transfer the ownership of the plan.
Gains from your plan may mean that
you lose some or all of your entitlement to
personal allowances and certain tax credits.
IIRC ( & its been a while since I dealt with onshore stuff), The 5% annual tax deferred allowance is in relation to basic rate tax payers only. Higher rate tax payers will have a liability for the difference between basic & higher rate tax on the withdrawals.
The Adviser fee is classed as a withdrawal (which it is- units are encashed & paid from the Bond), & the withdrawal is therefore liable to tax.
OP, the IFA has f
ked up there - this should have been expained to you, you can call the Pru & request that the Adviser charging be stopped. Edited by darreni on Friday 8th November 18:07
Edited by darreni on Friday 8th November 18:08
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