Portfolio management

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11. What should you hold where?

Your portfolio should be designed to make the most of the tax advantages available to you.

There is no point in taking pains to avoid Capital Gains Tax (CGT) if it is not payable on whatever you are investing in, or if you do not intend to sell for a very long time. On the other hand, there is every point in making sure that dividend income is paid to you, as far as possible, free of tax.

Many investors get this equation the wrong way round. They keep growth shares in their ISAs, although they have no intention of selling them anytime soon, and receive few if any dividends from them in the meantime. To compensate, they take income from stocks and bonds outside their ISA, even though this means they pay tax twice over. First, they pay for the investments out of taxed income. Then, they pay tax on the income from the investments.

Below is a handy checklist of the types of asset it is worth holding within and outside the tax-sheltered portion of your portfolio. Bear in mind it may not be worth paying to set up an ISA at all, if any gains you make are unlikely to exceed your annual CGT allowance for some years to come.

No tax shelter necessary

• Tracker funds
• Core holdings
• Steady growth shares held for medium to long term
• AIM shares (no CGT payable. Can be held in pension plans, but not ISAs)
• Gilts, i.e. government bonds (no CGT payable, though dividends are taxable)
• Unit and investment trusts, if held for long periods

Suitable for ISAs/ Self-Invested Pension Schemes

• Any shares bought as part of a rapid trading strategy (gains free of CGT)
• Foreign shares other than core holdings (ditto)
• Big dividend payers (the income is boosted by tax relief)
• Corporate bonds (ditto, plus protection from any CGT)
• Foreign bonds (ditto)

Suitable for PEPs (for existing holders only)

• As for ISAs, except that foreign shares and trusts with predominantly foreign holdings are not allowed.

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

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