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Mr and Mrs Brown want an overview of a discretionary managed portfolio which is held with Barclays Private Bank. Their objective is conservative growth with medium risk, with no investment restrictions applied to the management style.

The portfolio was established in September 1997 with a capital sum of £250,000 and at February 2002, through “careful” fund management, it had reduced to £200,000. How should the portfolio be reviewed, taking into account inheritance tax implications on the overall estate?

There is no doubt that we have seen a very difficult time in the investment world over the last five years. In the past, we have always advocated that a discretionary portfolio of shares and/or collectives makes sense for the bigger investor. However, I suspect there are many clients out there who are beginning to question the system of discretionary fund management.

We analysed the portfolio and noted that there was very little diversification in the holdings. At one point, 35 per cent was held in gilts, there were no corporate bonds or high-yielding corporate bonds and, surprisingly, based on discussions with the clients, the only reason these assets were held was on their instructions as they were concerned about markets.

Just under 3 per cent was held in “international stocks”. This, in fact, was the Henderson technology fund. In itself, this has been an excellent fund and, had the clients invested at the outset of their portfolio, the holdings would have shown an increase of 84 per cent. Unfortunately, it was only bought in March 2000 and has plummeted by some 70 per cent. Surely, if one wants a balanced, diversified portfolio, errors should not be made to this degree?

The portfolio has heavy exposure to TMTs and very little exposure to defensive stock. The clients have found the valuations less than easy to read and the communication on what is happening with the portfolio and why changes are being made is, to say the least, shoddy. It would appear our clients have not got a lot for their 1.5 per cent annual management charge, plus dealing fees on any collectives that may have been bought.

We have taken a broad range of fund managers and funds and used these as a benchmark to compare performance over the same timeframe. We have also allowed for a 5 per cent initial charge which, of course, the clients did not have with Barclays. We have then wrapped all this in a Skandia investment bond. The upshot is that the portfolio would have been worth in the region of £330,000. Some of the funds included were Newton managed, Fidelity American, HSBC European and Skandia property.

Clearly, the clients could have done better in collectives. They have decided that they are going to liquidate the portfolio and cut their losses. Some of the holdings are in Peps and Isas and, overall, there are no capital gains tax liabilities. The question is where do we put the money now?

Based on their total assets of £1.877m, their taxable estate amounts to £1.627m, allowing for a nil-rate band of £250,000. This means that inheritance tax of £650,800 might be due on the estate. When we pointed these figures out to our clients, they were naturally concerned. We are exploring the various solutions and, in the first instance, looking to set up a discretionary will trust to make use of both nil-rate bands. This will save them near on £100,000 at present.

We suggest the £200,000 from the portfolio is invested in an offshore bond through Canada Life International, with a suitable trust wrapper which will allow a potentially exempt transfer but enable the clients to take income withdrawals in a tax-efficient manner using the 5 per cent allowance. The contract could be established with no initial charge. At the end of the five-year establishment period, they will have a contract that is effectively clear, except for AMCs, with quality names such as Newton, Merrill Lynch and Threadneedle. Through bulk-buying, Canada Life clients are getting as near to creation as possible and can benefit from reduced AMCs.

It will enable us to build a structured portfolio, change fund managers if we see underperformance, get clear guidelines of the objectives of those funds and their benchmarks and report this to our clients.

Following their initial enquiry, we have identified that the clients wish to reduce income and inheritance tax, as well as administration and potential management fees. They wish to abandon discretionary fund management and work on an advisory basis through regular meetings with us. We have recommended that the Peps and Isas in their portfolio are dissolved, as they will still benefit from 5 per cent income tax deferral within the bond, as well as saving on inheritance tax. There still remains a sizeable inheritance tax liability but this will be reviewed over time.

We believe that clients need pampering at times like this. It is important to develop stronger links and trust for existing and new clients.


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