IFAs slam 'pedantic' HMRC move on structured products

Advisers and product providers have hit out at HMRC's move to challenge the ISAbility of certain kick-out plans.

According to Structured Retail Products.com, there have been 40 kick-outs issued in 2010, 127 in 2009 and 126 in 2008.

Kick-out or autocall products provide an early exit if the underlying index or security reaches a certain level.

However, HMRC has said it has found some of these securities do not satisfy the criteria to be an ISA qualifying investment.

It highlights paragraph 7.12 of the ISA Regulation which states: The condition that must be satisfied is that, at the date on which the security is purchased by the ISA manager, the terms on which it was issued do not require the loan to be repaid or the security to be re-purchased or redeemed within the period of five years from that date.

"As the requirement to redeem within five years is written into the terms of the product, it cannot be an ISA qualifying investment," the HMRC says in its latest ISA Bulletin.

HMRC says all ISA managers offering stocks and share ISAs with kick-out plans should contact the CAR Audit to discuss the matter.

Adviser have voiced their concern about the tax implications for their clients and urge HMRC to clear up the matter as soon as possible.

Ian Lowes, managing director of structured product specialist Lowes Financial Management, has criticised HMRC's 'pedantic move'.

"The rules say if you invest a debt-based security in an ISA it cannot be repayable within five years. However, a kick-out does not mean the money has to repaid, it just means the plan is returned to the bank. It all hangs on the wording.

"No provider would have deliberately bent the rules, but if they are viewed to be at fault this means investors will be penalised."

David Brunning, director of Sussex-based Brunning Newman Houghton, says: "I think this will be hugely surprising and disappointing to a great number of advisers. It cuts across the reason investors take these on, which is the flexibility."

"Many clients have taken these out in good faith, investing their whole ISA allowance.

"We now need to know: Are these going to be banned? Are they going to be taxed? Is it a case of wait and see if these products definitely redeem early or is it their potential to kick-out which is the issue?"

Blue Sky Asset Management CEO Chris Taylor says: "The bulletin from HMRC casts doubt on the ISAbility of kick-out plans. We presume the key to this is in the interpretation of kick-out conditions and definitions and ISA eligibility definitions.

"We interpret "do not require the loan to be repaid" to mean "do not require the loan to be repaid with any degree of certainty", rather than "do not require the possibility of the loan being required to be repaid" which HMRC now seem to believe (or want to assert).

"Different security issuance programmes use different wording, which may have some bearing on this, however HMRC's blanket reference to all auto-calls, in this bulletin is, based on our understanding, incorrect."

Gary Dale, head of intermediary sales at Investec Structured Products, says: "We are still unclear of the exact motivation of HMRC, but we are currently in discussion to understand their position going forward.

"Rest assured, before we launched our first FTSE 100 Enhanced Kick-Out plan we clarified the ISA point and obtained approval from HMRC. Clearly HMRC can always change their stance, but given our advance clearance it is unlikely to be applied retrospectively to us.

"As a principle Investec Structured Products has always adhered to the substance of HMRC guidance."