The world of private client investment management and advice is set for a seismic change over the next few years following a drastic cut in the annual amount exempt from capital gains tax in the UK. The amount, which stood at £12.3k in the tax year 2022-23, will be cut to £6k in 2023-24 and £3k in 2024-25.

 

 

Financial advisors have long directed clients with greater investible assets towards discretionary investment management services. This meant that their investments were run on a semi-bespoke basis with a specific investment manager acting as their point of contact. But the reduction in capital gains tax allowance will have a bearing on this industry dynamic and create major challenges for such services. The reason is the prospect of incurring significant tax bills if such investments fall outside the ambit of tax-free Individual Savings Accounts (ISAs) or pension wrappers. 

ISAs or pensions 

For investments held within ISAs or pensions, these investments can be changed without incurring a tax charge, as long as the assets stay within these tax efficient wrappers. However, the amount of money which can be invested in these wrappers has been coming down in inflation adjusted and even nominal terms. The ISA allowance has been static at £20k per person for 6 years, therefore falling in ‘real’, after-inflation terms, while the annual pension contribution allowance has fallen from £255,000 to £50,000 in 2012, then again to £40,000 in 2014 where it stayed for nine years before a rise to £60,000 was announced in March 2023. For individuals who use their full ISA and pension allowances on an annual basis, holding investments outside these tax wrappers means that Capital Gains Tax planning is something which will become increasingly important.  

Discretionary investment managers now face a daunting challenge of capitalising on opportunities, responding to changing market conditions and diversifying effectively while also aiming to limit tax liabilities without the benefit of generous capital gains tax allowances.

 

As an example, if a client has a portfolio of £500k that rises 7% during a year, that means that there will be £35k in net gains. However, in a given year, a portfolio change may be in order for various reasons, including the departure of a favoured fund manager, prospects of better opportunities elsewhere or the investment manager wishing to make an asset allocation alteration. Under the new regime, this will be difficult to achieve while limiting realised gains to only £6k this coming tax year and £3k thereafter. Losing investments can be sold to offset gains which may increase flexibility somewhat, but the margins are tight.

 

Year one is also but the start of the story. What happens if the portfolio appreciates by 7% the following year too? The portfolio then has tax encumbered assets which were not realised the year before with compounded further gains on top. The investment manager’s role is reduced to one of modest pruning to avoid creating a material tax liability for the client – probably not the service which the end client was hoping for at the outset, or what they are paying hefty fees for. One can see how this creates significant challenges and an environment where the portfolio will become increasingly caught in individual positions if the investment manager chooses to avoid crystalising gains. It also brings in extra career risk for the investment manager, if they decide to make a significant change that will almost certainly result in crystalised capital gains with no guarantee that the new change will be advantageous – potentially resulting in a tax bill for no incremental benefit, something the client will feel keenly – likely pushing the investment manager towards greater inertia.

 

The obvious solution to this tax problem comes from a logical source, the solution which is more often suggested for clients with smaller assets, unitised funds such as the Jupiter Merlin Portfolios. Unitised funds can make changes within their portfolios without crystalising capital gains tax. This means that the portfolios can be constructed and changed to adapt to the changing market dynamics and take advantage of opportunities as they arise without the need to consider the capital gains tax implications. As an example, one global growth manager the Jupiter Merlin team first invested with during July 2012 had risen over 370% by August 2022 when an asset allocation decision to reduce growth and buy value, led us to sell a portion of the holding. Within a discretionary managed portfolio, the tax liability of such a change could have been enormous, but within a unitised product the decision was made purely to maximise the long-term value of the investment portfolio.

 

Unitised products also allow capital gains tax allowances to be used on an annual basis by selling down sufficient units of the fund, with the rest of the capital left to compound over time while being managed in an efficient and effective manner. 

As an example, if the discretionary manager chooses to make 20% turnover, in the above scenario of 7% gains per annum, with the tax gains paid from within the portfolio, over time the portfolio value and its compounding is severely impacted. Whereas, in the unitised approach, capital gains tax allowances can be used while allowing the portfolio to compound over time, with the majority of the capital gains deferred to later in life.

Profit on £500k portfolio over 20 years

Profit on £500k portfolio over 20 years

*Assumes consistent gains across portfolio, higher rate tax liability, annual capital gains tax allowance of £6k in tax year 2023-24 and then £3k per annum thereafter.   

The pandemic, war in Ukraine and the huge spike in inflation over the last few years have shown just how unpredictable markets, economics and geopolitics can be and we believe being flexible, adaptable and open-minded will be critical in the management of client portfolios in the years ahead. Having been through over a decade of easy money and US equity market dominance, we could be moving into an era where markets will be led by real assets, natural resources, emerging markets, Europe or even the out of favour UK. If your clients’ portfolios are so constrained by tax as to restrict their management, how will they be able to respond to the changing dynamics in markets and maximise returns over time?

 

 

The answer to us is clear. Unitised, multi-manager portfolios which are flexible, liquid and managed by people who have a wealth of experience can provide the solution for all clients regardless of their liquid net wealth. These daily dealing funds are clear, comprehensible, easily comparable and transparent and allow investment decisions to be made on merit rather than by concerns on capital gains tax impact.  

Capital Gain Crystallisation 

Underlying Holding change Total sale and cash withdrawal
Discretionary investment management
ISA or Pension 		No No*
Discretionary investment management
Non - ISA or Pension 		Yes,
CGT crystallisation point		 Yes,
CGT crystallisation point
Unitised
ISA or Pension 		No No*
Unitised
Non-ISA or Pension 		No Yes,
CGT crystallisation point

*income tax may be payable

The value of active minds – independent thinking

A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

Fund specific risks

The NURS Key Investor Information Document, Supplementary Information Document and Scheme Particulars are available from Jupiter on request. The Jupiter Merlin Conservative Portfolio can invest more than 35% of its value in securities issued or guaranteed by an EEA state. The Jupiter Merlin Income, Jupiter Merlin Balanced and Jupiter Merlin Conservative Portfolios’ expenses are charged to capital, which can reduce the potential for capital growth.

Important information

This document is intended for investment professionals and is not for the use or benefit of other persons, including retail investors. This document is for informational purposes only and is not investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.
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