Readying Discretionary Investment Management (DFM) Portfolios for new Capital Gains Tax allowances

Joseph Marti


What do you do when you can only sell down one or two positions in a client’s portfolio in any given year? It becomes all the harder to justify your DFM fees in any case.

The UK is introducing a significant reduction in Capital Gains Tax (CGT) allowance, moving from £12,300 to £6,000 in 2023/24, and to £3,000 by 2024/25. By far the most common client-elected restriction across the UK discretionary market is CGT restrictions, with managers avoiding or limiting the CGT liability owed by the client in any given tax year by not selling positions that incur gains over the allowance.

Already, the prevalence of this restriction lands a real headwind for the industry – before we consider the lower thresholds – and is far from a confined problem. By restricting their ability to readily move in and out of clients’ positions, portfolios rapidly fill with older positions (that typically carry higher uncrystallised gains), moving portfolios further out of balance with the firm’s prevailing asset allocation.

Not only does this inhibit the ability of the firm to deliver the best possible investment outcomes for their clients, it also creates additional operational costs and complexities:

  • Firms’ market data costs rise as they have to price a wider investment universe (not just their target / “Buy” securities)
  • Asset servicing activities such as corporate actions, dividends, elections processing become more varied across a larger invested universe
  • Activities such as Fair Value assessments become more challenging and time consuming as firms have to justify fees against disparate portfolios and some that are less actively managed than the investment service would prescribe.

These costs may be somewhat hidden upfront by they are enormously punitive for the industry over time.

How material is this change?

The problem is most keenly felt in larger portfolios. While these less frequently have a specific restriction, it is by no means absent. The impact is all the greater given any percentage gain in a security will eat up more of the allowance than in smaller portfolios.

However, the change in allowances introduces limitations for many more clients and portfolios, that previously would only have been felt in larger portfolios. As an example:

  • Take a £500k portfolio comprising 12 securities, with positive 5% performance of all securities, generating a £25,000 gain in the year
  • In the financial year ending April 2024, the manager could sell down almost 3 holdings (50% of the book) without triggering a taxable gain
  • In 2024/25 this has reduced to 1.4 positions

Further, this would mean that you could only make a 30% trim to any given security about 5 times using the 2024/25 allowances, or just under 10 times with the allowances in our current tax year. This would be further emphasised in case of large market movements as we’ve seen recently.

What should I do?

The impact comes down to the Investment Management Agreement signed by the client. The specific wording should be reviewed to determine how ‘hard’ (mandatory) or ‘soft’ (best efforts) the restriction is, and whether this remains applicable given the change in rules. Regardless, it may fundamentally change how the portfolio is run and will have tax liability implications for the end client. It is likely to disproportionately impact new clients who are being re-invested to their new firm’s asset allocation, and longstanding clients with long-invested portfolios and older mandates. Without any action, we would expect more and more clients to deviate faster from the ideal asset allocation as movement in portfolios becomes more restricted.

Firms should:

  • Review client restrictions in light of the new regime
  • Consider the operational set-up to ensure these thresholds aren’t creating over-burdening books of business
  • Ensure technology and data provision allows managers access to real-time gains effectively as they review portfolios
  • Ensure the tools and processes are available to the front office to efficiently explain a CGT bill
  • Review fee arrangements when hard restrictions all but prevent activity in a portfolio until the client waives the restriction

The options firms are left with are simple enough, either:

  1. Remove the restriction from the IMA (with the client’s consent – and education); and/or
  2. Manage around the restriction

Those firms who have any population of CGT restricted mandates on taxable accounts would do well to review the impacted clients, proactively communicating the key messages, promptly delivering any technology or process changes – and readying teams for Tax Pack enquiries.

Should you require a second opinion on a course of action or some additional resource to get this over the line, we would be delighted to help so please reach out to us here.

About the Author

Joseph Marti
Associate Director

Joseph Marti is a senior member of our UK Wealth Management segment. Before joining Alpha, he worked as a discretionary investment manager of a UK Private Bank and managing a book of clients with a range of investment restrictions and permutations. Since moving into consultancy in 2016, he has supported senior leadership across some of the largest firms in the industry to change their business, product and operational set-up and to thrive.