Britons across the UK are increasingly turning to “Bed and ISA” transactions as the tax year-end approaches, seeking to protect their money from Rachel Reeves’s tax raids.
The process allows investors to utilise their annual capital gains tax allowance whilst moving investments into a tax-efficient environment.
This strategy, which involves selling investments in a dealing account and immediately repurchasing them within an ISA wrapper, has seen an quick growth in popularity.
With recent hikes in capital gains tax rates and significant reductions in tax-free allowances, these transactions have become an essential tool for savvy investors looking to minimise their tax liability.
Data from AJ Bell reveals an 18 per cent increase in Bed and ISA transactions during the first two weeks of the 2024/25 tax year compared to the same period in 2023/24.
These early-year transactions accounted for 30 per cent of all such deals in the 2024/25 tax year so far.
Even more striking was the 312 per cent year-on-year surge in October 2024 as speculation mounted ahead of Rachel Reeves’ inaugural Budget.
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Hargreaves Lansdown has also reported significant growth, with 59 per cent more clients using their ‘share exchange’ service – their term for Bed and ISA – than in the previous tax year.
The surge in Bed and ISA transactions comes as investors face what Charlene Young, pensions and savings expert at AJ Bell, describes as a “triple threat”.
“Investors have battled a triple threat of hikes in CGT rates, huge cuts to the tax-free allowances for capital gains and dividend income, and frozen tax bands,” she explained.
The Autumn Budget increased capital gains tax rates on stocks and shares from 10 per cent to 18 per cent for basic rate taxpayers and from 20 per cent to 24 per cent for higher and additional rate taxpayers.
This followed the reduction of the annual tax-free capital gains allowance to just £3,000 for 2024/25. The dividend allowance has also been slashed to £500.
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The process is straightforward but requires attention to timing. Investors sell their existing investments and immediately repurchase them within an ISA wrapper.
This simultaneous transaction minimises exposure to market movements and typically incurs only one dealing charge.
Sarah Coles of Hargreaves Lansdown notes that deadlines for these transactions come earlier than the tax year-end.
She said: “The deadline for this process is slightly earlier than the end of the tax year – for ISAs it’s 2pm on 4 April and for SIPPs it’s 2pm on 2 April.”
Most activity occurs in the first two weeks of a new tax year, though many investors act before budgets. Investors should consider several factors before undertaking a Bed and ISA transaction.
The process will use part of the annual £20,000 ISA allowance, so remaining headroom should be monitored. Capital gains tax will still be payable on gains exceeding the £3,000 annual tax-free amount.
Only investments traded on an exchange are eligible, including UK and most internationally-listed shares, investment trusts, ETFs and bonds, but not investment funds.
Additional charges may apply, such as stamp duty on repurchasing most UK-listed shares and foreign exchange charges on international shares.
Those looking to reposition their portfolio might find a Bed and ISA less suitable if planning to buy different investments.
For investors seeking to maximise tax efficiency, alternative strategies exist alongside standard Bed and ISA transactions.
Married couples or those in civil partnerships can utilise “Bed & Spouse & ISA”, allowing both partners to realise gains up to the allowance and shelter up to £20,000 each.
This approach enables couples to effectively double their tax-efficient capacity.
Another option is “Bed & SIPP”, which follows the same principle but places investments within a pension wrapper.
While offering significant tax benefits, this strategy requires careful consideration as it locks away funds until at least age 55.
Income-producing assets are typically prioritised for ISA protection, as income tax rates generally exceed capital gains rates.
