I am a director of a leading property company and my current shareholding
in the business is valued at £243,000. I have no other equity investments
of any significance. However, I am concerned at having such a high
proportion of wealth tied up in the fortunes of just one company. Could you
explain to me how I could create a more balanced portfolio without
incurring a substantial capital gains tax liability, while also minimising
my income tax payment.
As a higher-rate taxpayer, you will be faced with a substantial capital
gains tax liability if you dispose of the shares.
Unfortunately, there is no quick-fix solution to your problem but I will
outline the strategy we would propose adopting to help you diversify your
portfolio, while minimising the tax burden.
The first step of our strategy would be to name your wife, who is in a
lower income tax bracket, jointly on the portfolio assets.
This would enable us to make use of your combined income and capital gains
tax allowances for each year.
In order to gradually diversify the portfolio, each year we would sell
your shares in the company up to the value of your combined capital gains
Owing to the cyclical nature of the business, your company's share price
has a tendency to fluctuate dramatic ally, which would enable us to adopt
the following two-pronged strategy:
During periods when the share price is undervalued, shares would be sold
and repurchased within Isas, using both your annual tax-free Isa
allowances. This strategy would maximise the volume of shares sheltered
within the Isa wrapper.
Any subsequent growth when the value of the shares recovered would be free
During periods when the share price is overvalued, shares in the company
would be sold and the proceeds used to diversify both inside and outside
Your combined Isa investments would be managed within a maxi Isa alongside
the main portfolio as part of a single, cohesive investment strategy.
The charts below demonstrate how the above strategy worked in real life
for a client who came to us eight years ago with a similar brief. Our
objective was to achieve both diversification and tax efficiency. This
example has been chosen as it reflects real-life results rather than
hypothesising about future share prices and tax regimes..
Over the period, the portfolio has more than trebled in value to £819,000,
even allowing for several withdrawals during the period. Moreover, almost
half the total value of the portfolio – £317,000 – has been be sheltered
within the tax-free environment of Peps and Isas.
This strategy has left the client with £218,000 invested in shares across
a broad range of companies and sectors, providing a much more balanced
spread of investments.
Of the £601,000 still invested in his own company, £154,000 is now within
Peps and Isas and can therefore be switched without tax penalties if the
manager feels the time is right to do so.
The answer is based on the assumption that further information would be
required and provides only a guide to some of the relevant routes that an
intermediary could cover in advising the client.