No CGT on switch to clean funds

Here at Informed Choice, we are big fans of ‘clean’ funds.

These only charge for fund management, with the cost of platform administration and advice levied separately.

Before the introduction of the Retail Distribution Review on 31st December 2012, it was common for investment funds to include the cost of all three elements within their annual management charge.

From a typical 1.5% annual management charge on an actively managed fund, 0.75% would pay for fund management, 0.25% for platform administration and 0.5% for ongoing advice.

Because commission from investment funds can no longer be paid from the start of this year, fund providers are left needing to rebate at least the 0.5% part of the annual management charge back to the investor.

Clean funds simplify this process and, we believe, will result in the cost of fund management coming down over the next few years.

Because investors will be able to see precisely what they are paying for each element of the service, cost competition will inevitably increase and this will result in good outcomes for investors.

One sticking point in the move from ‘dirty’, ‘retail’ or ‘bundled’ funds to ‘clean’ funds has been the possibility of capital gains tax.

When selling retail units to buy clean units, investors were sometimes hit with a capital gains tax charge on the disposal of the original fund.

Whether a CGT charge applied always depended on how the funds were constructed, leaving investors with uncertainty over whether they would end up paying a sometimes substantial tax charge.

The good news is that CGT on a move from bundled to clean funds is no longer an issue for investors.

New HMRC rules mean that capital gains tax is waived on the switch from a bundled share class to a clean version of the same fund.

This combined with the rebate tax charge on retail funds, which was introduced at the start of this tax year, will no doubt speed up the demise of retail funds which bundle their charges.

Already on IC Direct, our investment platform for self-directed investors, we have 1,289 clean funds available from 42 providers.

This number is expected to continue rising until the majority of retail funds available to UK investors are available in their clean versions.

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