Many clients prefer for their portfolios to be managed by us proactively on their behalf. This is known as discretionary fund management. It has the advantage that we monitor the investments and make changes to the portfolio as required over time in accordance with market dynamics. This helps to optimise both performance and risk management. It also gives a client peace of mind as they do not need to be actively involved with decisions in respect of their investments. However, clients have the same access to valuations and regular review meetings with their adviser as they would if the advice were provided on an advisory basis.
Where a portfolio is held within an ISA or Pension, it is exempt from CGT. However, a portfolio within a General Investment Account (GIA) is within the CGT rules. This means that when investments are sold, the gain or loss is recorded and if total net gains exceed £3,000 in 2024/25 (the CGT exemption reduced from £12,000 to £6,000 last tax year and to £3,000 in the current tax year), CGT becomes payable. CGT is currently charged at 10% basic rate and 20% higher rate tax (please note, this is subject to change in the Budget on 30 October 2024). Gains are considered after income for tax purposes, ie. any income would utilise the basic rate tax band first. There is a specific part of the tax return for declaring capital gains. Both the tax return and any tax due have a deadline of 31 January after the end of the tax year in question, ie 31 January 2026 for any reportable gains in 2024/25.
For clients with discretionary portfolios, we may make changes to the portfolio at any time during the year as required by market conditions. However, generally portfolios will be rebalanced quarterly or semi-annually. These rebalances of your portfolio will result in some holdings being sold and others bought to optimise the portfolio. This can give rise to gains for CGT purposes, especially now the annual exemption has been reduced to just £3,000 per tax year.
In addition to periodic portfolio rebalancing, CGT can arise in a discretionary portfolio when an ISA is funded. This is because investments are sold in a GIA and the cash transferred into an ISA, sometimes referred to as ‘Bed and ISA’.
Finally, CGT may arise if you request either regular or one-off withdrawals from your GIA portfolio as assets may need to be realised to provide the cash for your withdrawal.
Overall, our advice is that ‘tax should not wag the investment dog’. In other words, it is most important that your GIA portfolio is invested in the most appropriate investments for your circumstances and risk profile. Whilst minimising tax is important it is secondary to investment considerations.
We make reporting for tax purposes as simple for you as possible. After the end of each tax year, usually during the summer months, the platform provider of your GIA will send you a tax pack. This will include a consolidated schedule of both income (dividends and interest) for income tax purposes and gains for CGT purposes.
If you have any questions regarding CGT in respect of your discretionary managed portfolio, please do not hesitate to get in touch with the office.
Please note that our view of capital gains tax is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.