Managing CGT through unitised funds

Cuts to the capital gains tax (CGT) exemption could see advisers flocking to unitised funds as a way of helping clients manage potential tax liabilities.

On 6 April, the annual CGT exemption was slashed to just £3,000 for the 2024/25 tax year. The reduction could see many more clients who hold investments outside an ISA or SIPP breaching their allowance and facing large tax liabilities as a result.

Tax treatment of unitised funds

Investing through a unitised fund could be one way of reducing the CGT burden. When an investment manager sells underlying investments within a unitised fund, it doesn’t give rise to a CGT liability. Instead, a potential liability only occurs when the investor sells units of the fund itself.

Generally, with a model portfolio, investments are held directly by the client, which means gains (or losses) will usually contribute to the client’s annual CGT exemption (unless, of course, the portfolio is held within a tax-efficient wrapper). Exactly how much of their exemption is used up will depend on how many underlying investments were bought or sold, and how the investments performed. The reduction in the CGT exemption makes it more likely that investors will exceed their allowance and pay tax on investment gains in any given year.

At RBC Brewin Dolphin, most of the assets in our unitised Voyager Funds and Managed Portfolio Service (MPS) are held through our MI Select Manager (MISM) Funds. The MISM Funds are ‘manager-of-managers’ funds and include mandates with institutional-level fees, which means they are very competitively priced. Many of the changes we make will take place within the MISM Funds, either by moving funds between the managers or by replacing a manager. These changes do not give rise to a CGT liability as this only occurs when units in the fund are sold. This approach may help to make the most of your client’s annual CGT exemption.

Long track record

Anecdotally, we’ve seen an increase in the number of advisers choosing our unitised Voyager Funds since the CGT changes were announced in 2023. Funds under management have hit an impressive £1bn, three and a half years after the funds were launched in October 2020. The funds were created in response to adviser demand for more choice and to extend opportunities to invest to more clients.

While the different tax treatment is no doubt part of the appeal of the Voyager Funds, it also reflects the existing track record we’ve built up through MPS, which was launched back in 2008. Each Voyager Fund is mapped to its equivalent MPS portfolio, so the investment approach behind the funds is well established.

Today, there are six funds within the Voyager range, catering for a range of investment risk appetites. The sixth fund, Voyager Max 100% Equity, was launched in autumn 2021, after advisers requested a fund at the highest end of the risk spectrum. The other five funds have maximum equity exposures ranging from 40% to 90%. The funds invest across different asset classes, regions, sectors and styles, offering ready-made diversification.

Greater choice

Being able to offer advisers the choice of a unitised fund, model portfolio or bespoke discretionary fund management service, in addition to sustainable investment options, means we offer a solution to suit every client. Each solution has different implications when it comes to managing CGT as well as other taxes such as income tax and dividend tax. Advisers can choose the approach that best suits their client’s needs and objectives, safe in the knowledge that the investment philosophy behind each solution has been honed over more than 25 years. Whatever is happening in the world of tax planning and in financial markets, you can rest assured that your clients’ investments are in good hands.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Opinions expressed in this publication are not necessarily the views held throughout RBC Brewin Dolphin Ltd.