Article How a multi-asset fund could help ease CGT exposure

Investing doesn’t need to be taxing. As we approach the end of the tax year, it’s likely many of your clients could be searching for guidance on how to make their savings and investments as tax efficient as possible.

For those clients with unwrapped investments, the potential for UK Capital Gains Tax (CGT) liabilities needs to be carefully considered – especially following recent changes to CGT rates and the tax-free annual allowance for individuals. In this article, we discuss how multi-asset funds could be a potential answer to managing CGT liabilities.

The impact of Capital Gains Tax changes

Chancellor Rachel Reeves’ Autumn Statement resulted in significant changes to CGT. The CGT burden for lower-rate taxpayers increased from 10% to 18%, and the higher rate from 20% to 24%. This coupled with the reduction of the CGT annual exemption – now at £3,000, compared with £12,300 in 2022/23 makes a tax efficient approach all the more vital for your clients. 

Discretionary fund management could now be under threat

Traditionally, discretionary managed services are a popular choice for higher-value portfolios, enabling a variety of market instruments to be utilised and risk levels to be adjusted, but following recent changes, this approach is potentially under threat.

One of the key benefits of a discretionary fund manager (DFM) has been the flexibility to move in and out of the market and investments on a shorter-term tactical basis. This ability has now been greatly reduced, with relatively small value transactions potentially triggering a taxable event.

A client’s portfolio is always a delicate balance of strategy, risk, the complexity of instruments, target return and cost. A more restrictive UK tax framework now means there’s greater pressure on how a DFM adds value for clients. It’s also worth remembering that the CGT tax exemption isn’t investment specific. It covers all capital gains within a tax year and many investment decisions can’t reasonably be expected to take each client’s broader taxable position into account.        

Multi asset funds – a solution to managing CGT

Understandably, many of your clients may be feeling nervous about how these changes might impact their investments and will be looking to you to recommend the most efficient solution in managing their tax liability.

According to the Office of Budget Responsibility, CGT receipts are expected to reach £15.2 billion in 2024/25.¹ With this in mind, it’s hardly surprising that CGT planning is becoming more of a priority.

Multi-asset funds are one solution that could help clients lower their CGT liability.

1. Efficient in managing CGT

Multi-asset funds can, by their very nature, be tax efficient. With multiple assets contained within one multi-asset fund, rather than across several products, there’s no CGT liability when the fund manager sells the underlying funds.

Instead, the taxable point for CGT purposes is when the client sells their shares in the fund. This means the fund manager can buy and sell investments at any time, with their only consideration being the strategy and the overall benefit to the fund.

2. Managed by investment professionals

It’s also worth highlighting that many multi-asset funds are managed by large teams with extensive investment experience and expertise who have a depth of market knowledge. The professional management of the funds means that investors can potentially benefit from fund managers ability to make informed decisions about asset allocation. This is particularly beneficial in a changing tax environment where fund managers stay abreast of changes and can adjust their strategies accordingly, targeting the best possible outcome for investors.

3. Targeted risk approach

Historically, fund guidelines have been fairly broad, based on the original mixed investment categories set by the Investment Association (IA). These categories included funds with 0-35% exposure to equities, increasing to 20-60% equity exposure, up to 40-85% equity exposure, for those willing to take on more risk for greater growth potential. These broad ranges meant the risk profile of the fund could materially change, exposing clients to more risk than they were perhaps comfortable with.

In recent times fund ranges have become much more sophisticated, with some multi-asset funds offering a wider range of risk levels within a fund range, offering clients a more targeted approach that aligns with their risk appetite.

One of the perceived benefits of a DFM has been getting the balance right between risk and return. However, the number of bespoke clients that can be managed effectively on this basis is finite and often more costly.

4. Cost effective

Cost and the desire to provide value for money are also important considerations. There are two primary charges within a portfolio, transactions and management fees. With the lower CGT annual exemption of £3,000 and higher rates of CGT now payable, the ability of a DFM to actively manage a client’s portfolio may be severely restricted and a bespoke management fee for a higher value portfolio may be under pressure. In many cases a multi-asset fund can benefit from economies of scale, lower management fees and potentially lower annual fees for funds selected within portfolios, reducing the ongoing charges. 

A combination of the factors outlined above could prove to be challenging for the DFM market and the growth they’ve enjoyed over recent years and could result in increased demand for multi-asset funds.

Multi-asset funds – a comprehensive and effective solution

In conclusion, multi-asset funds could offer a comprehensive and effective way to manage CGT liabilities. Their diversified nature, professional management, flexibility and tax efficient nature make them an attractive option for investors, while achieving their financial goals.