The popularity of managed portfolio services (MPS) has grown rapidly in recent years. According to research by Morningstar, the size of the UK on-platform MPS market was estimated to be £139 billion at the end of 2023 – around 14% of the total UK wealth management market.
Managed portfolio services – also known as model portfolio services – are centrally run investment portfolios, made up of a range of holdings that are identical for all investors. They are often built and managed in line with a set goal or goals and, commonly, will be defined by investor attitudes to risk and capacity for loss.
Morningstar found that nearly 80% of the underlying holdings of all the managed portfolios in its database are open-ended funds. 15% are ETFs and just under 5% are closed-end funds. It also noted that index funds made up the majority of the most-commonly held funds in UK managed portfolios.
What are the tax implications of MPS?
MPS investors hold the investments within the model portfolio directly. This means that when an investment manager sells or rebalances the investments within the portfolio, the end investor can be liable for capital gains tax (CGT) on any gains, unless they’re investing through a tax-efficient wrapper like an individual savings account (ISA) or a pension.
In recent years, the annual exemption amount (AEA) for CGT has been steadily decreasing from £12,300 in the 2022/23 tax year to £3,000 in 2024/25. As a result, more individuals are being pulled into the scope of CGT.
HMRC estimate that around a quarter of a million individuals and trusts would be subject to CGT for the first time by 2024/25 due to the reduction in the AEA. This was before Labour’s further changes to the rate of CGT.
MPS and ERI
Back in 2023, our sister company, Financial Software Ltd, commissioned a report from the lang cat to uncover the challenges the financial services industry was facing with excess reportable income (ERI) reporting.
The lang cat found that, of the MPS ranges they had on their Analyser software, 72% contained offshore funds. This means that there is a significant chance that an MPS investor would need to report ERI to HMRC.
Finding this information isn’t easy, however. The data is difficult to find, interpret and validate as funds aren’t required to provide ERI data in a standardised way or ensure that it is easily accessible. As a result, sourcing ERI information can be a frustrating and laborious process for an in-house team.
At Raw Knowledge, we do the heavy lifting of sourcing hard-to-find offshore funds data so you can focus on what matters most: your clients.
How can Raw Knowledge help?
Our ERI data solution provides you with a full data set for tax reporting, including fields rarely provided on a fund manager’s original documentation such as equalisation rates and the identification of asset breakdowns.
All our data is verified, structured and traceable, with an internal validation process at each stage, so you can have complete confidence that your reporting will be accurate. And, in the rare cases we don’t have full coverage of your targeted fund universe, our dedicated team are ready to dig deeper and conduct primary research to source the information you’re looking for.
Access to high-quality ERI data could also help set your firm apart from the competition and ensure you better meet stringent consumer duty standards. This is because if your firm is offering offshore funds to invest in, without being able to satisfy ERI reporting requirements, it could be argued that you are not adequately providing investors with the support they need to avoid foreseeable harm.
