What do CGT changes mean for model portfolio investors and could this stall growth in MPS?

In his 2022 autumn statement as Chancellor of the Exchequer, Jeremy Hunt announced a reduction of the individual CGT allowance from £12,300 in the 2022/23 tax year to £6,000 in 2023/24 and then £3,000 in 2024/2025. This means that around 260,000 more people will have to get their heads around completing a self assessment tax return, based on the tax information and impact note on the exemption reduction by HM Revenue and Customs (HMRC).

Many more investors, and their financial advisers, will also have to start factoring in considerations relating to CGT when deciding how best to structure their portfolios. Assuming a theoretical 5% realised annual capital gain, you would have to have had a portfolio of £246,000 before becoming liable for a penny of CGT in 2022/23. Following the changes to CGT allowances, this is set to fall by more than half to £120,000 for the 2023/24 tax year and this will then halve again to £60,000 for the 2024/25 tax year.

Popularity of MPS continues to grow

Over recent years, increasing numbers of investors have chosen to invest through a MPS. According to recent data from Platforum, MPS assets now exceed £100bn, overtaking bespoke portfolios managed by wealth managers for advisers.

One of the main reasons that investors cite for selecting an MPS is that unlike with a typical multi-asset fund, they have complete ‘look through’ to their portfolio on a platform. So they can see all the underlying investments and have comfort that they are fully diversified.

This transparency comes as a consequence of the investor holding the investments within the model portfolio directly. When an investment manager sells an investment within a model portfolio, the transaction is therefore subject to assessment for CGT (unless the investment is held within a tax efficient wrapper such as an a pension or ISA).

Investors in a MPS are taxed in the same way as they would be in any other investment portfolio. The tax treatment will depend on the specific investments held within the portfolio and the investor's personal tax situation. The amount of tax owed, if any, will depend on the investor's income tax bracket and the length of time the asset has been held.

Model portfolios are typically managed on a discretionary basis and rebalanced without reference to an individual’s tax liabilities. So a financial adviser will have no control over the size or timing of transactions within the model with reference to an investor’s tax position.

In the past, CGT considerations were largely confined to investors with larger investment portfolios, with financial advisers helping clients with larger portfolios to minimise their exposure through good management. Most investors avoided the tax with assessable gains falling below the £12,300 annual threshold.

The value of advice

With the annual CGT threshold now falling to £3,000, financial advisers will have many more clients who are liable to pay the tax and should be thinking about the best way to structure and manage their investments and whether to recommend any changes. This applies particularly to investors who are sensitive to tax implications and should include the use of a MPS along with all other investments.

To provide some perspective, it is worth noting that the maximum additional CGT that an investor could incur will be £1,260 in 2023/24 and £1,860 in 2024/25. This would happen if they made a made a gain of £12,300, the amount of the previous CGT allowance.

Potential additional CGT liability for clients who make gains of over £3,000 in the tax year 2024/25 relative to the current position (gains above £12,300 subject to CGT in 2022/23)

^{Source: Schroders}

We don’t expect that the tax changes announced will have much of an impact on portfolio construction or investor behaviour. Asset flows into MPS are also unlikely to be held back by much as model portfolios will remain an attractive proposition for many investors, particularly where the provider offers a broad range of styles and risk profiles. The suitability of an MPS will continue to depend on an individual's specific circumstances and investment goals, and this is where financial advice is essential.

To find out how Schroders can support you, contact your usual Schroders’ representative or call our Business Development Desk on +44 207 658 3894.