Managing Capital Gains within a Discretionary Mandate
Abbie Knight at DISCUS explains how prudent portfolio management is not solely about selecting the correct investments to generate attractive returns for clients. Actions taken within a portfolio may have a bearing on the amount of tax a client will be liable for at a point in time in the future.
When a client invests in a portfolio wrapped in an Open-Ended Investment Company (OEIC) ‘fund’ structure – versus a portfolio with direct holdings – certain tax advantages will apply.
Firstly, management fees can be deducted within the fund so there will be no VAT applicable on this element of the charging structure. Another perhaps more notable advantage is that any trading undertaken within the fund does not constitute a capital event for fund shareholders. Therefore investment decisions are unconstrained by tax considerations, which can maximise the fund manager’s ability to enhance investment performance.
The other side of the coin is that simply allowing the investment value to grow within the fund can result in a significant unrealised capital gains position building up. Upon eventual encashment of shares in the fund, a capital gains tax liability will likely arise. This liability will be a function of the growth in value of the holding since it was purchased, the amount invested and the client’s tax banding.
Services to manage capital gains tax
A number of the discretionary managers on the DISCUS site offer services to help advisers to manage capital gains for their clients, as part of a discretionary mandate. One such investment manager is Cornelian Asset Managers.
Clients investing through the Cornelian OEIC funds under a discretionary mandate can ‘opt in’ to allow Cornelian to utilise as much as possible of their annual capital gains tax allowance. The allowance – currently £11,100 for an individual in the 2015/16 tax year – cannot be carried forward into future tax years and thus it is tax efficient to realise gains where possible each year.
The tax management service in practice
Clearly Cornelian want avoid any out of the market risk for clients, so they don’t simply sell down OEIC fund shares for cash to utilise the annual allowance. Instead, proceeds of any sales to realise capital gains will generally be deployed into other Cornelian funds such that the client remains invested throughout.
After a period of at least 30 days, in compliance with HMRC rules, Cornelian then switch back into the original fund. It is important to note that the service has been designed to ensure the client’s exposure to investment risk does not increase beyond their mandated level during the exercise.
Stephen Ritchie, a Senior Investment Manager at Cornelian had this to add:
At Cornelian, our Managed Portfolio Service combines the tax advantages of investing through an OEIC structure with the ability to utilise our clients’ capital gains tax allowance each year on their behalf. Crucially, we maintain market exposure and the risk characteristics of our clients’ portfolios throughout the capital gains tax allowance management process.
This is just one example of how partnering with a discretionary manager can help you to streamline the delivery of your investment proposition, not only meeting your client’s investment objectives but managing their taxation position as well.
In closing, I should also mention that clients with direct holdings via a bespoke discretionary portfolio will typically gain access to a similar tax management service as part of their overall discretionary mandate. In this instance, the discretionary manager will use capital gains tax allowances as a matter of course and as a consequence of portfolio management throughout the tax year. Where possible, the manager can also perform trades to realise any loss-making positions at the end of the tax year to mitigate a capital gains tax liability.
Finally, I need to add the familiar caveat: should clients have any doubt about their tax position, they should consult their tax adviser. Cornelian is purely a discretionary investment manager and as such, cannot provide tax advice.