'I didn't use an Isa – how do I avoid a huge tax bill?'

Investing for the long term can often seem simple enough: put money to work, don't forget to diversify and stick to the process. But those who have successfully amassed wealth over time can often find this brings complications.

Thomas, a 69-year-old widower, is facing up to a few. He is in an enviable financial position: he owns a £550,000 mortgage-free home in Scotland and has a yearly income of £48,000 thanks to two final-salary workplace pensions (£36,000), £12,000 a year from dividends and the state pension. He even keeps his income from straying into the 40 per cent income tax band by adding money to his pension contributions.

Even beyond this, the assets are substantial: there is £229,000 invested in a handful of UK shares, including SSE (SSE) and National Grid (NG.) in a general investment account, a £141,000 untouched pension in a mixture of funds and UK shares and a modest individual savings account (Isa), again invested in UK shares. Then there is £26,000 in cash and Premium Bonds and £48,000 in cash in his consultancy business.

Thomas wants to run the business for a few more years and has been advised that he can wind the company up relatively cheaply if he reduces the cash to less than £20,000. "This might mean I put the surplus cash into my pension and help boost my tax-free lump sum," he says.

Beyond that, he sees himself spending money on holidays, a new car and home improvements in his later years, while helping his three children financially. Thomas has already sold a piece of land in New Zealand and gave £165,000 to his youngest son to buy a house, and would like to balance this up with the other two. He does not plan to downsize or move and would like to pass the property on to his children when he dies.

A major concern centres on avoiding racking up a hefty tax bill, having failed to shelter some of his long-standing holdings in a tax wrapper. "I have good income-earning utilities that I bought during the Thatcher privatisation years," he says. "These have grown into substantial holdings thanks to dividend reinvestment."

He adds: "I avoided putting these into Isas because I didn't want to pay management fees, and was more than happy to run the money down using the £12,300 capital gains tax (CGT) annual allowance. Sadly this is now no longer available and I realise this was a mistake." The allowance will fall to £3,000 on 6 April this year.

Thomas also wants to grow his pension by 5 per cent a year and is happy to take some risk, although some 46 per cent of the pot is held in cash. "I can afford to be much more adventurous here, both with geography and diversity, with a core holding of world growth and more exposure to US stocks," he says.

He doesn't intend to draw on the pension until age 75. "Around that age, I will wind up my company and perhaps start drawdown and take the 25 per cent tax-free lump sum, although I recognise that I may not need it," he says.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES

Rob Morgan, chief analyst at Charles Stanley, says:

Your tax dilemma is tricky – and galling given the time you have held these shares. Indexation and taper relief no longer apply, and many people have been caught out by the significant reductions in the CGT and dividend allowance to as little as £3,000 and £500 a year, respectively, from the next tax year. 

A 'bed and Isa', whereby your Isa buys the shares from your shares account, would only crystallise the gain, and you can't transfer them to anyone else as this would also count as a sale. Overall, I come back to the adage that the tax tail shouldn’t wag the investment dog, and your holding in SSE in particular presents considerable concentration risk, so it may be time to bite the bullet.

Given you're a lower-rate taxpayer, the CGT rate on your shares is 10 per cent above the annual allowance. But selling £20,000 a year into your Isa would protect an increasing amount from tax going forward. You would then get yourself into a better position, enabling you to mix and match taxable and tax-free income top-ups from both the pension and Isa throughout retirement as and when you need it, as well as diversifying appropriately.

This would reduce your overall taxable income over time and allow you to take cash from the business more tax-efficiently. This could be used to work harder for you or for shorter-term spending needs. Over the six years until age 75, you could move £120,000 if the Isa allowance stays the same.

You could also look to venture capital trusts and Enterprise Investment Schemes to reduce income tax, and the latter for CGT deferral too, but I doubt these would fit with the amount of risk you would be comfortable with.

The make-up of your pension also demands attention and, given it is likely to be for the longer term, there is too much in cash and not enough diversification. Consider how and when you’ll draw that pension money. For inheritance tax purposes, you would tend to draw on personal pensions last as they fall outside your estate under current rules. You are under the £1mn threshold using two nil-rate bands, but we don’t know how things might change.

Moving from individual shares into mostly funds also makes sense to provide much more diversification and to eliminate reliance on UK shares, considering your general investment account and your Isa.

Think internationally when building a portfolio – and global options alongside your existing funds and trusts will help. A global tracker is a possibility, but for less reliance on US stocks, some active funds such as JOHCM Global Opportunities (IE00B89PQM59), Fidelity Global Dividend (GB00B7GJPN73) and Metropolis Value (GB00B3LDLX86) provide a good spread.

I’d also suggest owning bonds. Having been highly unattractive for several years, they are back in play as a source of return, especially when inflation and interest rates fall more than anticipated. Some options include Morgan Stanley Global Fixed Income Opportunities (LU1206779933), Schroder Strategic Credit (GB00B11DNZ00) and Vanguard Global Credit Bond (IE00BYV1RG46).

Scott Gallacher, chartered financial planner at Rowley Turton, says:

You deserve recognition for a commendable financial position. However, like many DIY investors, you have overlooked crucial planning measures such as annual 'bed and Isa' exercises. Utilising tax shelters to put a barrier between your finances and the taxman is vital. Isas serve as an excellent shield in this regard.

The share portfolio is laden with gains, posing potential CGT liabilities, especially in the event of takeovers. Despite the recent slashing of the CGT allowance, you still have your annual allowance, offering some relief. And remember, only the actual realised gain is taxable rather than the entire proceeds. And as you have continuously reinvested dividends and bought shares at different prices, your actual gain might be lower than it seems. Speak to your Isa and shares account provider to help calculate a proper bill. 

As with most parents, you wish to treat your three children equally. However, you previously made a significant gift to your youngest son. Consider adjusting your will or giving additional gifts to your older children in the UK to rectify this imbalance.

One solution to address this, and mitigate the CGT, involves gifting shares to a discretionary trust to benefit the elder children. By doing so, you can use holdover relief to transfer the CGT liability to the trust. Subsequently, the trustees can distribute the shares to the children, with a further holdover claim from the trust enabling them to sell the shares and use their individual CGT allowances.

When contemplating significant gifts, proceed with caution to avoid financial strain. We always advocate individuals undergo a lifestyle cash flow planning exercise to ensure they can afford such gifts. However, considering your age and secure pension income, you may be well-positioned to make such gifts without jeopardising your financial stability.

Your small Isa requires attention. Reviewing the investment portfolio regularly is essential to ensure it aligns with your financial goals and risk tolerance. Also, I think you have misunderstood the risk associated with stocks, a common mistake. For example, while you aim to minimise risk, particularly with direct shareholdings, you believe you can tolerate your pension being high risk and can tolerate losses of up to 20 per cent. However, such losses categorise you as a more cautious or balanced investor. By contrast, pure equity investors typically face losses of around 45 per cent during major market downturns, as seen in past crises such as the dotcom crash and the banking crisis.

Your financial situation presents both opportunities and challenges. If you address the neglected planning and consider a 'bed and Isa', while ensuring equitable asset distribution among your children, you can help fortify your position. Moreover, a better appreciation of CGT implications and risk tolerance is essential to ensure you make the right decisions in the future.