Are you sitting on a Zombie investment portfolio? A zombie portfolio is one which, through time, has grown so much that sensible changes cannot be made without triggering significant Capital Gains Tax (CGT). Let’s demonstrate this with an example:
The unrealised gains are £545,000.
The annual CGT exemption of £11,300 has little impact; so without triggering CGT, the portfolio assumes a zombie like state.
What on earth are you to do? Your portfolio manager could suggest that sales should be made, perhaps because:-
- A particular investment is too large a percentage of your overall portfolio, and it would be unduly risky not to diversify, or
- The risk of a significant fall in value of some of your stocks outweighs the tax triggered by a sale.
Or your portfolio manager may well suggest to you that at 20%, that’s not a bad rate of tax to pay compared with the higher rate of income tax (40% or 45% in England and Wales, 41% and 46% in Scotland, for 2018/19). Why not just live off the capital and pay 20%? Plus, the longer-term risk that the CGT rate might increase.
However, many clients are psychologically averse to living off capital, regardless of the tax position.
Alternatively, your portfolio manager may suggest that you invest in an Enterprise Investment Scheme product. Apart from an income tax rebate of 30%, this type of investment achieves CGT deferral for capital gains made in the 3 years prior to investing in EIS. The trouble about EIS investments is that they are both risky and illiquid (difficult to sell) and the CGT deferral is reversed on a sale of the EIS shares; it is not a permanent relief.
So are there any other things you might contemplate doing with your zombie portfolio? The Hamilton Financial answer is YES!
The total annual management charges (amc) paid by clients of the “big bugs” on a portfolio worth £990,000 for annual investment advice could well be 1% + VAT i.e. 1.2% – possibly lower in aggregate terms, but quite possibly higher when you factor in commission payable at say 1% on trades. In the above example, 1.2% comes to £11,880 per annum. Quite a lot I suggest for ensuring you use the annual ISA allowance (£20,000) and the annual CGT exemption of £11,300. Now I have simplified matters by ignoring ISAs and SIPPs (Self Invested Pension Plans) where managers can actively manage without worrying about CGT – but you can see what I mean. In any event, I suggest that it would be worth asking your manager for a substantial reduction in fees.
Just so you know, our fee for managing a zombie portfolio is a flat 0.6%; that’s regardless of portfolio size or complexity. (This is 0.2% to the provider of the safe custody platform plus 0.4% to Hamilton Financial.)
This zombie portfolio fee covers investment management, investment advice, general tax advice and pension advice. A potential saving using the above example of £5,940 (50%) per annum.
Should you move manager just to reduce investment management costs?
The answer is no. But, if by moving to a quality firm* you are also saving money, then of course you should consider moving. Sticking with the same example, after five years, the saving is just shy of £30,000 – by any standards, a lot of money.
*A quality firm is a firm that delivers good investment returns – measured over five years plus – allied to a high level of personal service.