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Low-tax spread

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.

Joint assets

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.

Equity disposal

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

tax allowances.

Tax avoidance

Owing to the cyclical nature of the business, your company&#39s 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

of tax.

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

Isas.

Isas

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.

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