Comment: If only Capital Gains Tax could be pruned

But there comes a point when invisible forces of inertia kick in. It’s not laziness, or lack of ambition, or absence of fresh ideas. It’s the fact that, over time, change becomes progressively more difficult to undertake.

There is a reluctance to part company with funds and trusts that have served us well – particularly where we have reinvested the income and the value has grown. We view the sight of accumulated gains as a validation of our judgement; the intrinsic pleasure of a tended plant bending under the weight of its fruit. Who would chop down such a deeply rewarding tree?

New species are always tempting, of course. But when we started out, we probably went for the sturdier and more enduring plants. Which one of these would we sacrifice to make room for something untried and whose resistance to the trials of weather and adversity is unknown?

Over the years I have accumulated many different varieties of roses. And by and large it is the better-known and long-popular plants that I would be most loath to lose. Even pruning them evokes a concern not to damage such an enduring and trusted old favourite. Thus it is with our nest egg of investments. Where there is change, it is usually done by gradual increment.

But there is another reason why we find ourselves tending a garden of unplucked fruit: an instinctive recoil from Capital Gains Tax. When we start out on long-term savings, few of us worry about CGT. At the bottom of the hill, our savings are so small and the prospect of this tax so remote that we cannot conceive the problems it could come to pose.

CGT is a tax on the profit when you sell or give away something (an “asset”) that has increased in value. It is the gain you make that is taxed. For example, if you bought some shares for £2,500 and sold them later for £12,500, this means you made a gain of £10,000 (£12,500 less £2,500).

The current rates are 18 per cent and 28 per cent for individuals, depending on your total taxable income. There is an annual tax-free allowance (the Annual Exempt Amount) which in the current financial year is £11,000.

Today, of course, we can mitigate the impact of CGT by saving through tax sheltered Individual Savings Accounts or by contributions to tax-exempt pension schemes. But we are often not at all sure in the early years whether we can commit to long-term savings plans and we may wish to save for relatively short periods to accumulate funds for a specific ambition.

For all sorts of reasons, investors in later years come to find that they have a CGT problem; unanticipated and unallowed for. The impressive paper total to which our investments have grown over time turn out to be not quite so impressive once CGT strikes.

Now, £11,000 may seem a generous exempt allowance. But investors in late middle age who wish to undertake a long-delayed home extension or improvement may find they need to raise quite a considerable sum. Once you’ve seen the overshoot on the builder’s estimate, the hidden fees and extras, and allowed for incidentals and soft furnishings, the project may come to £40,000 or more.

Investors need to be careful in raising this sum that they do not trigger a CGT liability. This is often typically avoided by selling those investments where the gain is not so large as to trigger a tax liability – but this may only shift the problem into future years. Investors can come to find they have a portfolio of holdings comprising some very substantial gains, but they can be like the tree of forbidden fruit: the juicy apple that on plucking is immediately attacked by the termites of the taxman.

This is how investors in late middle age find they have a portfolio of untouchable gains. They come to feel deeply resentful that money invested out of already taxed income to secure comfort and security in retirement should be penalised in this fashion. There is something profoundly inequitable about the taxman being allowed to knock twice.

Many are thus reluctant to switch or change funds for fear of incurring this tax punishment. And, when added to the other forces working in favour of sticking with old investment favourites, portfolios become less amenable to the radical tidying and scything and axing so favoured of the pundits.

The best course for those trapped in the garden of untouchable fruit is a programme of gentle annual pruning below that £11,000 gain threshold.