Capital Gains Tax and MPS

What is a Managed Portfolio Service (MPS)?

An MPS is a centrally run set of strategies of differing risk profiles, where the investment managers have discretion over the holdings in each strategy, and all clients in each strategy hold the same investments. Most MPS’ are constructed to provide clients with exposure to a range of asset classes.

What does the change in the AEA mean for Managed Portfolio Services (MPS)?

Traditionally these asset classes are accessed through the selection of externally managed third-party funds. To implement any changes at the security level, i.e., to sell one fund in order to buy another (for instance, to reflect a change in the investment manager’s preferred exposures) requires an investment manager to adjust the blend of these external funds.

As an example, should an investment manager wish to increase the exposure to technology companies within a client’s North American equity exposure, they may be required to reduce (or sell in full) the holding of a fund with zero exposure to this sector, in favour of another that has been positioned to hold a number of these companies. If a client’s MPS portfolio was held within a general investment account (GIA), and their AEA had been exceeded for the year, this action would represent a chargeable event.

What about Quilter Cheviot’s MPS?

Our approach to constructing MPS portfolios is unique and is centred around the incorporation of the ‘Building Blocks’, a range of eight funds designed exclusively for use within Quilter Cheviot’s MPS strategies. These funds are combined in different weights to create our MPS strategies, which provide a range of different investment objectives and risk profiles for clients:

Constructing our MPS strategies in this manner brings with it a number of benefits, including complete control over how your investment portfolio is composed.

By having responsibility as the MPS model manager (determining the blend of asset classes within the strategy by setting the chosen weight to each Building Block), as well as acting as the appointed fund manager to each Building Block (determining the underlying investments within each Building Block fund), our approach reduces the possibility of crystallisation events occurring at the security level. This is because changes to security selection exposures take place within the underlying Building Block funds, an environment not subject to CGT. Only asset allocation changes which are made on an ad hoc basis (e.g., reducing the European Building Block in favour of the UK Building Block) are deemed crystallisation events, thereby potentially realising a profit or loss for CGT purposes.

To revisit our example from earlier, a decision to increase exposure to technology companies within the North American equity exposure would be implemented within Quilter Cheviot’s MPS in a swift, granular fashion: one that avoids the need for time out of the market or, crucially for this example, a requirement to crystallise profits at the portfolio level. The MPS managers would simply implement this investment decision within the North American Building Block fund, increasing exposure to the preferred companies within the sector. An example of the types of securities directly owned within the fund can be found below:

As can be seen, this Building Blocks approach allows us to be more agile than traditional MPS solutions.

Is there a right answer?

The reduction in the AEA may encourage some investors to avoid realising gains, postponing crystallisation events in an attempt to minimise their tax bill. While this may appear preferable in the near term, over the longer term this strategy may be detrimental.

If, for instance, future CGT rates are higher, perhaps even equalised with those on income tax, then it may be deemed preferable to avoid storing up all returns.

For CGT purposes, our offering sits somewhere in between a traditional MPS and a multi-asset fund, whereby no returns are realised and there is a full gross roll-up in profits. As discussed, the approach also delivers a number of key implementation benefits, while also ensuring exceptional value-for-money for what constitutes a fully active investment solution.

Please contact your usual Quilter Cheviot representative should you wish to learn more, or alternatively visit Managed Portfolio Service | Quilter Cheviot for additional information.

This material is not tax, legal or accounting advice and should not be relied on for tax, legal or accounting purposes. Quilter Cheviot Limited does not provide tax, legal or accounting advice. You should consult your own tax, legal and accounting adviser(s) before engaging in any transaction.