‘I’m 54 with £70k of capital gains outside of an Isa – how can I cash it in tax free?’
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Dear Victoria,
I am a 54-year-old (married) woman who gave up work almost 20 years ago to raise our three children.
With investing, saving and inheritance, I have around £110,000 in a stocks & shares Isa, around £130,000 in a general investment account, about £25,000 in cash (split between Isa and non-Isa accounts).
I probably need to simplify my portfolio but am not quite sure where to start!
I read a lot about having some core funds but I don’t know if I have some of these already and what percentage of my portfolio they should be. My goal is to have a balanced portfolio which will continue to grow over the next 10 years or so and will then provide us with an additional source of income in retirement.
My husband is still working and not likely to retire for about another 10 years, so we shouldn’t need to access this until then. In the meantime, I want to ensure that my portfolio is in good shape. I am looking for decent growth and not too much risk at this stage.
I have a reasonable final salary pension which I can take in about six years. That will give me around £850 per month with a lump sum of £68,000. In time, I should qualify for the full state pension. My husband will also have a pension but I am unsure what that will be.
Another issue I have is that my non-Isa share account has grown considerably and I now have around £60,000 to £70,000 of capital gains. Because the capital gains tax limit is now so low, I am never going to be able to access this without paying some tax. Should I start selling some shares over the next few years and paying the relevant CGT, just to start moving the money out?
I would use the cash to top up my stocks and shares Isa, but I would have some left over.
I always read your column with great interest and hope you can help me this time.
Best wishes,
Natalie
Dear Natalie,
You’re clearly in a strong position with over a quarter of a million pounds invested and in cash alongside you and your husband’s pensions due down the line.
I think you’ve got a lot of the right ideas – you have a sensible long-term (10 year) investment horizon, you’re looking to simplify things to create a balanced portfolio, and you’re aiming for growth without piling on excessive risk (although striking that balance isn’t always easy).
It looks to me like you’ve added various new investment ideas to your portfolio over time. This isn’t necessarily a bad thing but can result in a complex portfolio of stocks and funds which becomes hard to keep track of.
And often it is easy to lose sight of whether the overall, top-down view of your portfolio still fully aligns with your investment goals.
So, let’s take a step back, do some analysis and I’ll try to offer some suggestions as to how you might simplify and shift your portfolio slightly to give you the best chance of success over the coming decade.
Starting with your single-stock holdings, which account for almost one-tenth of your Isa, you seem to have a mish-mash of FTSE 100 companies. I’m curious about why you’ve gone entirely for UK names and not looked further afield.
Investors have been punished by home bias in recent years, given the disappointing performance of UK Plc. Having said that, BAE Systems has been a fantastic winner for you.
Legal & General I’d argue is better suited to an income investor, rather than someone going for growth like yourself.
BT and Haleon account for less than 1pc each, which isn’t big enough to move the dial.
Have a think about how wedded you are to your single-stock UK names – I’d consider getting rid of any you don’t feel particularly strongly towards so you can start simplifying and sharpening up your portfolio.
I would try to be quite ruthless about letting go of your stragglers.
Moving on to your collective investments, there is nothing that particularly alarms me but again there appears to be a lack of structure. As I’ve mentioned in previous columns, splitting a portfolio into “core” and “satellite” holdings helps to give your portfolio balance and reduce risk.
For the core part of the portfolio (around 70pc) look to invest in multi-asset funds or those that invest in developed market equities.
The satellite part, or remainder, is where investors can add some spicier funds that are higher risk but can produce higher returns.
Your Isa has a lot of investment trusts that I would consider as core holdings: Bankers, Brunner, Caledonia Investments, City of London, JPMorgan Global Growth & Income, Law Debenture and Witan Investment Trust. You also have invested in a Vanguard S&P 500 index fund, another core holding.
I would suggest you consider dropping some of your investment trusts, and upping your remaining trust holdings to an allocation of around 10pc to 15pc each.
Witan stood out to me as being on the chopping block due to its performance being underwhelming over multiple time periods, but the announcement this week that it is proposing to join forces with Alliance Trust has changed my view.
Alliance Trust’s strategy of outsourcing the decision-making to external fund managers, which pick 10 to 20 of their best stock ideas, has paid off since Willis Towers Watson took over the mandate seven years ago. From the beginning of April 2017 to March 2024, Alliance Trust’s net asset value (NAV) total return was 104.2pc against 95.7pc for the MSCI All Country World Index (Alliance Trust’s benchmark).
I would be inclined to take a hard look at all of the core investment trusts and then decide which to sell based on those not pulling their weight the most in terms of performance.
Also consider if any of those trusts are not offering something genuinely different from your other holdings in terms of how they invest.
Your investment trust Isa holdings that would fit into the satellite part of the portfolio include Aberforth Smaller Companies, Fidelity Special Values, Invesco Asia and Scottish Mortgage.
Something that stands out here is your 25pc allocation to Scottish Mortgage. A quarter of your portfolio allocated to any one investment is too high in my opinion, as it has way too much influence over your overall performance, making your portfolio less resilient and less diversified.
Scottish Mortgage’s share price total return over one year is 33.4pc, but over three years it has lost 27.8pc.
Its recent returns have benefited from its share buyback plan and a strong performance from technology behemoths in America. Nvidia is its top holding and Amazon is its fourth biggest, both of which have benefitted from the frenzy around artificial intelligence.
Clearly Scottish Mortgage has had a tough three years, but appears to be on a stronger footing now, so I wouldn’t want to suggest selling too early during this more positive phase. But keep in mind ideally you don’t want to have so many of your eggs in one basket – just something to think about in the coming years to minimise your portfolio’s vulnerabilities.
Addressing your question about what to do with capital gains tax on your non-Isa investments, the capital gains tax allowance is £3,000 so you could start dripping out your non-Isa investments, realising £3,000 of gains each year into an Isa through a “bed and Isa”, which is where you sell investments and rebuy them in an Isa.
You could also use losses to offset gains – selling assets that have made gains and losses in the same tax year, to bring down your overall profit.
Another option is to consider opening a Self-invested personal pension or Sipp. You would get tax relief on top of your investments, so £800 invested would immediately grow to £1,000.
You can access 25pc tax free but would need to pay income tax on the rest. Pensions are also free from inheritance tax, so have some tax advantages over Isas.
Having said all that, I’m not a tax expert so it is probably a good idea to speak to someone who specialises in this area.
I would also suggest sitting down with your husband to work out roughly what pension he’s likely to get just to check you’re on track for where you want to be financially as a couple in retirement.
Best of luck!
Victoria is head of investment at Interactive Investor. Her columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.