Model portfolios across multiple tax wrappers
parawhat
Member
I appreciate this question may be a little pie in the sky and I'm being too optimistic about UK platform technology, but I've got to ask as no one in our office seems to know the answer...
Do any platforms provide the functionality to be able to manage model portfolios across multiple different tax wrappers?
For example, say we wanted to recommended the following model portfolio for a client investing £1,200,000:
30% Global Equity Fund
30% UK Equity Income Fund
40% UK Fixed Interest
And say we had recommended an ISA, GIA and onshore bond wrapper. The standard way I am used to dealing with this would be to create three individual portfolios for each wrapper as follows:
ISA
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
GIA
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
Onshore Bond
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
Total combined portfolio - £1,200,000
But let's say instead, for tax planning reasons, I wanted to hold specific asset classes in specific tax wrappers as follows:
Do any platforms allow model portfolios to be managed across tax wrappers in this way so I could, for example, rebalance even though different elements of the model were in different tax wrappers?
Cheers
Jonny
Do any platforms provide the functionality to be able to manage model portfolios across multiple different tax wrappers?
For example, say we wanted to recommended the following model portfolio for a client investing £1,200,000:
30% Global Equity Fund
30% UK Equity Income Fund
40% UK Fixed Interest
And say we had recommended an ISA, GIA and onshore bond wrapper. The standard way I am used to dealing with this would be to create three individual portfolios for each wrapper as follows:
ISA
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
GIA
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
Onshore Bond
30% Global Equity Fund - £120,000
30% UK Equity Income Fund - £120,000
40% UK Fixed Interest - £160,000
Total - £400,000
Total combined portfolio - £1,200,000
But let's say instead, for tax planning reasons, I wanted to hold specific asset classes in specific tax wrappers as follows:
ISA
30% UK Equity Income Fund - £360,000
GIA
30% Global Equity Fund - £360,000
Onshore Bond
40% UK Fixed Interest - £480,000
Total combined portfolio - £1,200,000
30% UK Equity Income Fund - £360,000
GIA
30% Global Equity Fund - £360,000
Onshore Bond
40% UK Fixed Interest - £480,000
Total combined portfolio - £1,200,000
Do any platforms allow model portfolios to be managed across tax wrappers in this way so I could, for example, rebalance even though different elements of the model were in different tax wrappers?
Cheers
Jonny
Jonny (paraflex)
Comments
Probably because the consequences of such an approach would be a potential tax nightmare. You could have money moving in and out of these wrappers, possibly creating a bond chargeable gain; you could also be n the situation of moving funds out of an ISA which you could not subsequently get back into the ISA.
Whilst on a pure tax management the theory may show such an approach is effective the reality is that it is rarely that simple.
The old adage of tax tail wagging the investment dog springs to mind.
I suspect you're right about the potential for such a strategy to cause more problems than it saves. However, I've been tasked to investigate anyway!
I'm not sure I follow your point about money moving in and out of wrappers creating chargeable gains or meaning you couldn't get money back into ISAs. Fund switches could be carried out in either wrapper without any tax consequences. Obviously GIA fund switches you'd need to keep an eye on CGT but nothing new there. The only scenario I could see causing issues is if you needed to alter the balance of capital between tax wrappers because of a fundamental underlying asset allocation change e.g. change of risk profile or dumping of a whole asset class.
I agree about the tax tail wagging the dog and for smaller portfolios this approach would be overkill. However, with larger portfolios there are meaningful tax savings to be made provided the strategy can be easily implemented and administered. The potential tax savings are also very dependent on the client circumstances e.g. are they going to be a lower rate tax payer in retirement than they are now, or are they married so can use inter spouse planning (e.g. assign bond segments, bed & spouse etc).
Clearly, if we had to charge increased admin fees to administer such a portfolio that then cancelled out any tax savings it would be a non-starter. However, if the above could be done relatively easily and the tax savings outweighed any increased costs, why wouldn't you adopt such an approach?
You may then find at another rebalance you need to move Global Equity out of GIA to increase UK equity (In ISA) but the amount involved exceeds available ISA allowance.
Similarly, if you needed to take a signifiant amount out of onshore bond at some point you can create a chargeable event / gain.
I'm of the view that such an approach is a really bad idea and will create way more problems than it solves.
You are far more likely to have asset allocation rebalancing to do than switching funds if you are going to manage the portfolio risk profile to the client's desires attitude to risk.
If the approach is to buy and hold and never make changes then such an asset class linked to wrapper approach works but I cant see how that is ever a good long-term investment strategy.
I think you're probably right on the rebalancing point. That would kill it unless, like you say, you adopted a more static asset allocation approach. That approach might wipe out any tax savings though.
I'll scratch it up as another one for the theory books only...
Cheers
Jonny