When a DFM Client Dies: The Portfolio Is the Asset That Behaves Worst

Death does something unusual to an investment portfolio. It hands the estate a tax outcome most clients spent their lives working towards, and simultaneously removes the authority to act on it.

The first half is well understood. Section 62(1) of the Taxation of Chargeable Gains Act 1992 is unambiguous: the deceased’s assets “shall not be deemed to be disposed of by him on his death”, and are instead “deemed to be acquired on his death by the personal representatives … for a consideration equal to their market value at the date of the death”.

No disposal, no charge, and a fresh base cost. The embedded gain that made every rebalancing conversation for the last fifteen years awkward has gone.

The second half is where firms come unstuck. On the day that happens, nobody has the authority to do anything about it.

The Authority Gap

A discretionary mandate is granted by the client. It does not outlive them.

The practical consequence is that from the date of death the manager cannot deal, and will not deal, until the personal representatives give fresh instructions. Those instructions usually require a grant of representation, and a grant can take months. In the meantime the portfolio typically moves to a no-trade status: income continues to arrive, fees continue to be charged in most agreements, and nothing is managed.

So the portfolio sits, fully invested, at whatever risk profile suited a living client with a twenty-year horizon, through a period when its purpose has changed completely and nobody is watching it.

That is not a regulatory failure. It is the correct legal position. But it is a service failure if the family discovers it by accident, and it is an investment failure if the market moves against an estate that nobody could de-risk.

Where the firm is the discretionary manager’s client rather than the individual, the sequence is different and the obligation lands differently. We set out the mechanics in agent as client versus reliance on others. A firm running both structures needs two protocols, because in one the manager’s contract survives the death and in the other it does not.

Three Clocks Start on the Date of Death

They run at different speeds and only one of them is obvious.

Clock one: Inheritance Tax. Due by the end of the sixth month after the month of death, and a payment on account is generally needed before the grant is issued. Which produces the structural absurdity at the centre of estate administration: the tax falls due before the authority to sell the assets exists. Instalments and grant on credit are the escape routes, and both need to be identified early rather than discovered in month five.

Clock two: the annual exempt amount. HMRC’s Capital Gains Manual at CG30600 allows personal representatives the full annual exempt amount for the tax year of death, “no matter how short this period is”, and for the two years of assessment following. After that, nothing for the remainder of the administration period.

Three tax years of £3,000. Against a £900,000 portfolio that is a rounding error, and treating it as a planning tool is a category mistake. Its real use is as a deadline: it tells you the administration has a tax shape that degrades, and that a slow estate is a more expensive estate.

Clock three: the probate valuation. Market value at the date of death sets the base cost for everything that follows. Getting a clean, documented valuation as at that date is the single highest-value administrative act in the first fortnight, and it is the one most likely to be left to whoever the family rings first.

The Decision That Actually Costs Money

Once the grant is in hand, there are two routes out of a managed portfolio, and firms default to the wrong one because it is easier.

	Sell inside the estate	Transfer in specie to legatees
Who pays CGT on later gains	Personal representatives	The beneficiary
Rate	24%	18% within the basic rate band, 24% above
Annual exempt amount	PRs, £3,000, three tax years only	Each beneficiary’s own, every year
Base cost passed on	Not applicable	Probate value
Administrative burden	Low	Higher, and platform dependent
Cash available for IHT	Yes	No

The default is to liquidate, distribute cash and close the file. It is clean, it funds the tax, and it is frequently the most expensive answer available, because it concentrates every subsequent gain into a single 24% payer with one £3,000 allowance and a hard three-year limit on it.

An in-specie transfer to several beneficiaries spreads the gain across several taxpayers, several allowances and potentially a lower rate, and it hands each of them a base cost at probate value. For an estate with adult children in different tax positions, the difference is not marginal.

It is also more work, which is the real reason it does not happen. The honest version of the conversation is that the cheaper route for the family is the more expensive route for the administrator.

What the Portfolio Should Be Doing in the Meantime

Two things worth separating.

The first is risk. An estate’s investment objective is not the deceased’s investment objective. The portfolio now has a short, defined horizon ending at distribution, and a known liability landing within six months. A 70% equity allocation that was correct in September is not obviously correct in October. Once the PRs can instruct, de-risking towards the IHT payment is usually the first conversation, not the last.

The second is the free rebalance. This is the one genuine gift in the whole process. Every unrealised gain has been extinguished and the base cost reset. Concentrated holdings that could never be trimmed without a tax bill can now be trimmed without one. A legacy portfolio full of a single bank’s shares, held for thirty years because selling was unthinkable, can be fixed.

That window is open from the date of death and it narrows as the market moves away from probate value. Firms that treat bereavement purely as an administrative event miss it entirely.

The Protocol

Most firms have a bereavement process that covers notifications and sympathy. Few have one that covers the portfolio. It needs to answer six questions before it is needed:

1. Who records the date of death, and who notifies the discretionary manager, the platform and the custodian, within what timescale.
2. What trading status the portfolio moves to, who authorises that, and whether the agreement permits anything other than a full stop.
3. How fees and income are treated from the date of death, and whether the family has been told.
4. Who obtains the probate valuation, in what form, and where it is filed.
5. Who identifies the IHT liquidity problem, and when instalments or grant on credit get considered. Not in month five.
6. When the annual exempt amount window is diarised, and who reviews the in-specie decision before the default liquidation happens.

None of that is difficult. All of it is currently held in the head of whichever colleague has done it before.

The wider planning context sits in intergenerational wealth transfer, and for clients whose estates include business relief holdings, AIM portfolios and the new IHT cap and pensions and IHT from April 2027 both change the arithmetic materially. The ongoing tax treatment of the portfolio itself is covered in tax implications of DFM portfolios.

The Point

The tax system is generous on death and the legal system is slow, and the gap between the two is where value leaks out of an estate.

The portfolio is the asset most exposed to that gap, because it is the one that keeps moving while nobody has permission to touch it. A firm that writes down what happens in the first fortnight will produce better outcomes than one that improvises, and it will do so at the moment a family is least able to tell the difference.

Which is the argument for writing it down now rather than next time.