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Should tax on commisison rebates affect move to Cavendish Online?

Financial Advice | General Helpful? 7

Asked by izmirli, submitted 18 May 2013.

Open Quote I am considering changing my financial adviser (Bestinvest) to Cavendish Online which refunds part of the commission it gets from the fund managers. However, recently I read in the Sunday papers that the HMRC is going to tax the commission refunded to the investors. Consequently, do you think if it is still worthwhile to make the move from Bestinvest to Cavendish Online?
End Quote

Answered by Justin on 28 June 2013

If you're using Bestinvest's traditional discount broking service via Cofunds or FundsNetwork (no longer available for new clients) you should be enjoying a full initial commission rebate, given via reduced fund initial charges, with Bestinvest keeping the trail commission of typically 0.5% a year for themselves.

Bestinvest's newer 'Select' service provides some trail commission rebate too, typically around 0.1% - 0.2% a year. This compares to Cavendish Online rebating full trail commission of typically 0.5%. However, Bestinvest provides decent fund research and some useful tools, so you'll need to decide whether these merit the cost premium over Cavendish Online's no-frills service.

You're right, commission rebates outside of ISAs and pensions are now taxable. However, discount brokers have largely been surprisingly quiet so far on exactly how this is being handled.

Because discount brokers will be forced to move away from the commission rebate model for new business by April 2014, the issue over rebates being taxed should pass quite quickly. The rules abolishing rebates won't kick in on existing investments until April 2016, but since the pricing for new customers must be in place by next April it should prove straightforward for existing customers to move across to this if beneficial.

However, what this does mean is that both Bestinvest's and Cavendish Online's pricing models will have to change (for new investments at least) by next April.

It's hard to try and second guess how much Bestinvest will charge and in what form, as running their own platform gives greater flexibility to change things. I suspect Cavendish Online will use standard 'clean' versions of funds (without commission and platform fees built in), try to negotiate a flat 0.20% annual FundsNetwork platform fee and charge customers 0.05% a year, so basically the same net result as present, but without having to pay a rebate.

If you're in no rush to make a decision I'd sit tight until both companies have announced their new charging structures, but I doubt overall cost or the service provided will change much from the present.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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