A portfolio that is never rebalanced does not stay the same shape it started in. Because different assets grow at different rates, a portfolio that begins as 60% equities and 40% bonds might, after several strong years for shares, quietly drift to 75% equities and 25% bonds — a materially riskier mix than originally intended, arrived at without the investor making any active decision at all. Rebalancing is the discipline of periodically bringing a portfolio back towards its intended allocation, and doing it well — without triggering unnecessary tax or cost — is a skill in its own right for UK fund investors.
Why portfolios drift
Over time, the best-performing assets in a portfolio become a larger share of the total simply because they have grown more. This is a completely normal consequence of markets moving at different speeds, not a sign anything has gone wrong. But left unchecked, this drift changes a portfolio's actual risk level in ways the original investor may not have chosen deliberately. A portfolio that has drifted heavily towards equities after a strong bull run, for instance, will typically fall further in the next downturn than the investor's original risk tolerance was designed to withstand.
Approaches to rebalancing
Calendar-based rebalancing
The simplest approach is to review and rebalance on a fixed schedule — commonly once a year, sometimes every six months. This has the advantage of being simple, predictable and easy to stick to, without requiring constant monitoring.
Threshold-based rebalancing
An alternative is to rebalance only when an allocation drifts beyond a set tolerance — for example, if a target 60% equity allocation moves more than five percentage points away from target in either direction. This means rebalancing happens only when it is actually needed, potentially reducing the number of trades (and any associated costs) compared with a fixed schedule.
Combining both
Many investors use a hybrid: check the portfolio on a fixed schedule (say, annually), but only actually rebalance if drift has exceeded a chosen threshold at that check-in point.
| Approach | Advantage | Drawback |
|---|---|---|
| Calendar-based | Simple, predictable, easy habit to build | May trigger unnecessary trades in a stable market, or miss large drift between dates |
| Threshold-based | Rebalances only when genuinely needed | Requires more frequent monitoring to spot drift |
| Hybrid | Balances simplicity with responsiveness | Slightly more complex to set up initially |
Rebalancing inside an ISA or SIPP
One of the significant practical advantages of rebalancing inside a tax-free wrapper such as an ISA or a SIPP is that selling one fund and buying another does not trigger Capital Gains Tax, because gains within these wrappers are not subject to CGT at all, and ISA income is also outside the scope of income tax. This makes rebalancing considerably more straightforward within a wrapper than outside one, since the tax consequences that complicate rebalancing in a general investment account simply do not arise.
Rebalancing outside a tax wrapper
Outside an ISA or SIPP — for example, in a general investment account — selling a fund that has risen in value can crystallise a capital gain, potentially subject to Capital Gains Tax. As of the 2025/26 tax year, individuals have a CGT annual exempt amount of £3,000, with gains above that taxed at 18% for basic rate taxpayers and 24% for higher and additional rate taxpayers on investment gains. This means rebalancing outside a wrapper requires more care.
Techniques to reduce the tax impact
- Rebalance with new contributions first. Rather than selling an overweight asset, direct new money towards the underweight asset until the target allocation is restored, avoiding a disposal altogether.
- Use the annual CGT exempt amount deliberately. Realising gains up to the £3,000 annual exempt amount each year, where rebalancing requires some selling, uses the allowance rather than wasting it.
- Consider "Bed and ISA". This process involves selling a holding in a general investment account and repurchasing an equivalent holding within an ISA, using up part of the £20,000 annual ISA allowance, which can gradually move assets into a tax-free wrapper while managing any CGT due on the sale.
- Time disposals across tax years where a large rebalancing is needed, spreading gains to make fuller use of more than one year's exempt amount.
Practical mechanics of rebalancing
- Establish the target allocation at the outset — for example, 70% equities, 30% bonds, or a specific core-and-satellite split.
- Check the current actual allocation, ideally by looking through to the underlying asset classes in each fund, not just fund names.
- Compare the drift against target and against any threshold that has been set.
- Decide whether to rebalance using new contributions, selling and buying, or a combination of both.
- Where selling is required outside a wrapper, calculate the tax impact before acting.
A worked example
Suppose a hypothetical investor starts a £100,000 ISA with a target of 70% equities (£70,000) and 30% bonds (£30,000). After two strong years for equities, the portfolio has grown to £130,000, with equities now worth £100,000 (77%) and bonds worth £30,000 (23%) — the actual value of the bond holding hasn't changed, but its proportion of the total has shrunk. To return to the 70/30 target on a £130,000 portfolio, the investor would need £91,000 in equities and £39,000 in bonds — meaning selling roughly £9,000 of the equity fund and buying roughly £9,000 of the bond fund. Because this all happens inside an ISA, there is no Capital Gains Tax to consider on the sale, only any dealing costs the platform charges.
Rebalancing with contributions versus rebalancing by selling
There are, broadly, two mechanisms for bringing a portfolio back to target: directing new money towards whichever asset has become underweight, or actively selling the overweight asset and buying the underweight one. Which is more appropriate depends largely on whether new contributions are still being made.
Contribution-based rebalancing
For an investor still regularly contributing — through monthly ISA payments or ongoing pension contributions, for example — directing those new contributions towards whatever asset class has drifted below target is often the simplest and most cost-effective form of rebalancing. It requires no selling at all, avoids any tax event outside a wrapper, and gradually corrects drift over time as contributions continue to flow in.
Sell-and-buy rebalancing
Where a portfolio is no longer receiving regular contributions — for example, in retirement, or where the drift is too large to correct through contributions alone within a reasonable time — actively selling the overweight asset and buying the underweight one becomes necessary. This is more likely to have tax and cost implications, particularly outside an ISA or SIPP, and is the scenario where the tax-efficient techniques discussed above become most relevant.
Rebalancing a core-and-satellite structure specifically
For portfolios built using a core-and-satellite approach, rebalancing has a slightly different flavour: rather than simply restoring an equity/bond split, it typically means trimming satellite positions that have grown disproportionately large relative to the core, and topping up those that have shrunk, in order to preserve the originally intended balance between stability and targeted conviction. A satellite that has performed exceptionally well can otherwise grow to represent a much larger share of total risk than originally intended, quietly turning a disciplined structure into a concentrated bet by accident.
Setting a written rebalancing policy
Many experienced investors find it useful to write down, in advance, the specific rules they intend to follow — for example, "rebalance annually every January, or immediately if any asset class drifts more than five percentage points from target". Having this decided in a calm moment, rather than during a period of market stress or excitement, removes a layer of emotional decision-making from a task that works best when carried out mechanically and unemotionally.
How often is too often
Rebalancing too frequently can itself be counterproductive, particularly outside a tax wrapper, where each rebalancing trade may have cost or tax implications, and inside a wrapper where frequent trading can still incur dealing charges depending on the platform's fee structure. Most guidance suggests reviewing no more than a few times a year is generally sufficient for a typical long-term portfolio.
Rebalancing across a household
Where a couple holds investments jointly or across separate ISAs and SIPPs, rebalancing can sometimes be more efficient when considered across the whole household's holdings rather than account by account. For example, if one partner's ISA has drifted overweight in equities while the other partner's SIPP is underweight, directing new contributions accordingly across the two accounts may reduce the need to sell within either individual account. This requires a degree of coordination and joint recordkeeping that not every household maintains, but for those willing to do so, it can reduce the overall number of taxable disposals needed outside tax wrappers.
Keeping records of rebalancing decisions
Keeping a simple record of when a portfolio was rebalanced, the reasoning at the time, and the resulting allocation provides a useful reference point for future reviews, and can also support accurate Capital Gains Tax reporting for any holdings outside an ISA or SIPP where disposals have occurred as part of the rebalancing process.
Key takeaways
- Portfolios drift from their target allocation as different assets grow at different rates, gradually and often unintentionally changing overall risk.
- Calendar-based, threshold-based, and hybrid approaches are all common ways to decide when to rebalance.
- Rebalancing inside an ISA or SIPP avoids Capital Gains Tax entirely, since these wrappers are outside CGT's scope.
- Outside a wrapper, techniques such as directing new contributions to underweight assets, using the annual CGT exempt amount, and "Bed and ISA" can reduce the tax impact.
- Rebalancing too often can add unnecessary cost; a few reviews a year is typically sufficient for most portfolios.
- Always check current HMRC and FCA figures and allowances, as these change from tax year to tax year.