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  • HMRC successfully appeal tax case on loyalty bonuses

    A loyalty bonus is a discount provided against the ongoing management charges paid by investors, thereby saving them money on their investments.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    A loyalty bonus is paid to clients which effectively reduces the cost of the ongoing management charges, thereby saving investors money on their investments.

    • In March 2018, the first tier tax tribunal ruled that loyalty bonuses are not taxable
    • HMRC have successfully appealed this ruling
    • The outcome is that loyalty bonuses are taxed as income
    • HL has accepted this ruling

    Chris Hill, Chief Executive of Hargreaves Lansdown:

    “We challenged this tax on behalf of investors as we always felt it was an unnecessary and unwarranted attack. Naturally we are very disappointed and following legal advice we have reluctantly accepted this ruling. A successful outcome would have seen over £19 million returned to around 170,000 investors.”

    Explained

    A loyalty bonus is paid to clients which effectively reduces the cost of the ongoing management charges, thereby saving investors money on their investments. HL introduced these bonuses over 15 years ago, and hundreds of thousands of our clients have enjoyed significant savings since then.

    When Hargreaves Lansdown introduced loyalty bonuses, we consulted HMRC on their tax position and it was clear at that time, as a refund of charges, they would not be subject to taxation.

    However, in March 2013, HMRC changed its position, announcing that rebates of annual charges (such as loyalty bonuses) paid on funds held outside ISAs or SIPPs should be taxed as income and paid net of basic rate tax.

    We thought this was an unwarranted attack on private investors so we challenged HMRC on behalf of investors, taking our case to the tax tribunal.

    In March 2018, the first tier tax tribunal ruled that loyalty bonuses are not taxable.

    The ruling would not only see money returned to investors, but also no need to declare these discounts on tax returns, simplifying investors’ tax affairs.

    HMRC has successfully appealed this ruling. We have reviewed the findings of the Upper Tax Tribunal with our lawyers and concluded that overturning the court’s ruling is extremely unlikely. We will therefore not be appealing the decision.

    Impact on investors

    HL continue to pay loyalty bonuses to clients. Since 6 April 2013, these bonuses have been paid after deducting a 20% provision for the tax (being equivalent to the basic rate of income tax) to pay to HMRC. The reason we did this was to avoid creating large and unexpected tax bills for clients in the future should the legal challenge prove unsuccessful, as it has done.

    Investors were advised to include loyalty bonuses as income on their tax returns. Basic rate taxpayers suffer no further tax charge, however, higher and additional rate taxpayers could be liable to either an extra 20% or 25% tax.

    Next stages and what investors should do

    We will continue to pay loyalty bonuses with the 20% basic rate tax deduction and clients should continue to include loyalty bonuses as income on their tax returns.

    Loyalty bonus FAQs

    How are investments in an ISA and SIPP affected?

    This tax doesn’t apply to loyalty bonuses paid into ISAs or SIPPs, and does not affect ISA and SIPP contribution allowances.

    How does the Personal Savings Allowance or the Dividend Allowance fit in? Could these income payments be tax free anyway?

    No. The ruling is that loyalty bonuses are income, not interest or dividends, and so neither of these allowances apply.

    Do loyalty bonuses need to be declared on a tax return?

    Investors should continue treating loyalty bonuses as they do today.

    Non-taxpayers and basic rate taxpayers don’t need to take any action.

    Higher and additional rate taxpayers should declare loyalty bonuses paid in the Fund and Share Account on their tax return. Additional tax above the 20% basic rate reserved could be payable. Loyalty bonuses paid in the ISA and SIPP do not need to be declared.

    Loyalty bonuses received by overseas investors, companies and charities are not required to be paid with the deduction of tax. Therefore loyalty bonuses can be paid without the deduction of an amount equivalent to the basic rate tax.

    This tax does not apply to the payment of initial discounts, nor to loyalty bonuses received in the Fund and Share Account before 6 April 2013.

    Does the tax rate differ for Scottish taxpayers?

    Yes, Scottish taxpayers will pay their normal marginal rate of income tax.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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