A rising number of investors are using the Bed & Isa gambit to protect their assets ahead of a tax grab this April, industry figures reveal.
This oddly-named manoeuvre involves selling investments held outside an Isa and buying them back inside a new or existing one, with the tedious trading business handled for you by your investing platform.
Demand for this service is expected to keep surging ahead of a swingeing spring cuts to the capital gain tax allowance, taking it down from £6,000 to £3,000.
Meanwhile, the dividend tax-free allowance will be hacked back from £1,000 to £500.
Bed & Isa: This involves selling investments held outside an Isa and buying them back inside a new or existing on
The CGT and dividend allowances were already halved last April, from £12,000 and £2,000, respectively, which has concentrated investors’ minds on getting more or all of their wealth into the safety of a stocks & shares Isa.
But you do have to weigh up the potential CGT bill on selling your investments and investigate the costs of the transaction.
Also, due to the trading and time involved, you should not leave a Bed & Isa until just before the end of the tax year. See below for how Bed & Isa transactions work and what to consider first.
> How to choose the best (and cheapest) stocks and shares Isa and the right DIY investing account
Online DIY investing site Interactive Investor says it already saw a 7 per cent rise in Bed & Isa applications in January compared with the previous year.
That follows a 53 per cent spike in 2023 versus the year before.
‘The shrinking capital gains and dividend tax allowances provide the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so,’ says Myron Jobson, senior personal finance analyst at II.
‘Shifting investments into an Isa protects future gains and dividends from the clutches of tax. Known as Bed & Isa, the process is a valuable tool as part of a broader portfolio spring clean strategy.
‘The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.’
Graham Brodie, wealth planner at Succession Wealth, says: ‘An Isa is one of the most tax efficient savings vehicles you can find. Within an Isa, any interest earned from cash savings and income from dividends grows free of income tax. Investment gains are also safeguarded from CGT.
‘Investments held outside of an Isa may be subject to tax. Currently, the maximum amount that can be invested into an Isa is £20,000 per annum, and this allowance cannot be carried forward into a new tax year. Any unused allowance in this tax year will be lost on 5 April 2024.
‘Because of this, if you have investments held outside of an Isa wrapper, it may make sense to utilise the Bed & Isa transaction.’
What impact will changes to CGT and dividend tax have on investors?
Interactive Investor looks at how the changes affect different gain levels across three tax years.
What should you consider before embarking on a Bed and Isa deal?
Graham Brodie of Succession Wealth offers the following tips.
1) The Bed & Isa process: Each tax year existing investments up to the value of any unused Isa allowance (the ‘bed’ part of the transaction) are sold and the proceeds used to open a new Isa or to top up an existing Isa account.
You can buy the same investments back within the Isa wrapper, choose other investments or simply hold the cash within your Isa
Over the years you will shelter more of your portfolio from tax. This can help to provide tax free income and reduce your CGT bill in future years.
2) Capital Gains Tax: When you sell your investments to begin a Bed & Isa transaction you may have to pay CGT if your gains for the year exceed the annual allowance – currently £6,000 in the 2023-24 tax year. This allowance will be cut to £3,000 in the 2024-25 tax year.
If you make a loss, this could be offset against any other capital gains you may make in this or future years.
Taxation of gains above the annual allowances is currently charged at 10 per cent for basic rate taxpayers and 20 per cent for higher rate taxpayers.
In addition, UK investors using the Bed & Isa transaction do not have to wait 30 days before acquiring the same share or same class of a specific fund as they would if selling and repurchasing shares outside of the Isa wrapper.
3) Other costs: There will be costs involved if you use the Bed & Isa strategy. These will typically include dealing fees, stamp duty, platform charges and a fund switching cost or initial charge.
Although costs are an essential consideration, over the long term, the tax advantages of holding investments within an Isa will likely outweigh the charges.
4) Time out of the market: Even though the Bed & Isa process is quick, there is a risk that any time out of the market could have a detrimental impact on your investments.
Shares are usually sold and repurchased simultaneously to limit potential price movement, but the sale and repurchase of funds can take a few days.
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