IFM07200 - Investors in tax elected funds (TEFs): tax treatment of distributions: trail commission

What is trail commission?

Trail commission means a commission or fee paid to investors by fund managers, fund platforms, advisers, or any other person acting as an intermediary between the fund and the investor.

All or part of any trail commission may be paid to the investor – for example, as part of an agreement between the investor and the fund platform, their adviser or the fund manager.

Trail commission typically originates from the annual management charge paid by the fund to the fund manager.

How is trail commission treated for tax purposes?

HMRC considers that payments of trail commission to the investor are taxable on the investor. The payments made to investors are ‘annual payments’. This view was confirmed in the case of The Commissioners for HM Revenue and Customs v Hargreaves Lansdown Asset Management Ltd: [2019] UKUT 0246 (TCC). The view of the judges in this case was that the payments made to investors represent a further income distribution in respect of the investment in the fund and were not a discount of the annual management charges.

The fund manager, fund platform, adviser or other intermediary paying trail commission to investors must deduct tax at the appropriate rate of tax from the payment of trail commission and account for this to HMRC.