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Portfolio rebalancing to cost clients under Labour’s CGT plan

Portfolio rebalancing to cost clients under Labour’s CGT plan

Advisers have been warned that routine actions they take on behalf of clients, such as portfolio rebalancing, would incur a potentially large tax bill if the Labour Party wins the upcoming general election.

Under that party’s proposals, the capital gains tax tax free allowance of £12,000 would be abolished and CGT rates would be replaced by a tax on capital gains at an investor's personal income tax rate.

The party has said this will make sure income from wealth is taxed "equitably and efficiently".

Jason Hollands, managing director at Tilney, said this could affect advisers who rebalanced a client's portfolio, either to crystalise gains or to manage risk within the client’s portfolio.

He said: "By removing the annual capital gains exemption, sensible day-to-day investment management decisions, such as rebalancing a portfolio to keep it in line with an investor’s objectives and risk profile, or switching out of a fund because the manager has left, will potentially crystallise a tax liability each time.

"Under such a scenario, this would likely shift demand towards unitised solutions ahead of implementation since trades within Oeics and unit trusts do not incur a CGT liability. The latter only incurs when units/shares in the fund itself are sold."

For example, if a client’s risk profile was deemed to require an equity exposure of no more than 60 per cent, and the equity funds chosen performed well, then the client’s portfolio could have more than 60 per cent equities in it, meaning the adviser would need to sell some of the equity investments to bring the portfolio back in line with the risk profile of the client.

Minesh Patel, an adviser at EA Financial Solutions in London said regulators required discretionary fund managers to perform “extensive due diligence” to ensure clients were kept within the appropriate risk category.

He said: “This means DFMs are rebalancing portfolios constantly, and under these plans, that would incur a tax charge each time. We have a very large number of clients who hold assets outside of tax wrappers, given that the Isa allowance is only £20,000, and the pension allowance is £40,000, we would have a number of very wealthy clients who hold assets outside of those wrappers, through unit trusts or bonds.

"With the clients we manage ourselves, as opposed to via DFMs, we rebalance once a year, and have always ensured we didn’t breach the £12,000 CGT annual limit when doing do."

In its manifesto, the Labour Party said: "Labour believes that returns from wealth should not be taxed less than those from income. Currently people can earn more income from buying property than from working for a living, and they can pay lower taxes on that. This is not just economically inefficient but socially unfair."

The party cited the Resolution Foundation and the Institute for Fiscal Studies as organisations which had both called for the UK's CGT system to be reformed because it was not working.