Model portfolios and CGT on monies not “tax wrapped”

There is a potential CGT liability risk when clients are investing in model portfolio’s – and which are not within any form of tax wrapper (SIPP / ISA etc.).

We recently raised a concern with an external DFM regarding CGT resulting from investment movements arranged by the DFM on a discretionary basis for any client holding funds in a general investment account on a platform.  As there was no tax wrapper involved, if and when investments were switched we had concerns as to whether any attention was paid to the effect the changes will have on CGT for the client.

In this case (which we suspect may apply to many) for this portfolio the primary objective was to cap volatility and to this end there are times when the manager must make substantial changes and move the asset allocation well away from the benchmark – and in doing so this could potentially incur CGT liabilities.

Bearing this aspect in mind it meant that this fund in particular was best suited to clients within a tax wrapper such as a SIPPs, ISAs or bonds.

Clearly there’s only so much one can do but clients should be made aware of the risk of leaving monies in a general investment account – more particularly if this could have been avoided by switching into a tax wrapper or perhaps using the annual exemption.

Whilst it’s very nice to nice to have made a substantial gain, it wouldn’t be so nice after the event to have to then tell the client there’s tax to pay.