The strategy known as Bed & Isa has seen a notable rise in popularity this spring, according to AJ Bell, as investors grapple with increased tax burdens.
This method involves selling shares, trusts, ETFs, and other assets held outside a stocks and shares ISA, then repurchasing them within an ISA. This strategic move is particularly common at the beginning of the tax year.
AJ Bell reports a 76 percent increase in such transactions compared to the previous year during this busy period.
“Investors opting for this strategy typically hold assets outside of a tax-protected environment,” explains Sarah Coles from the investment platform.
She warns that delaying the process leaves these investments vulnerable to taxes on dividends or gains, which could result in unexpected tax liabilities.
Coles also mentions that some investors may have taken advantage of early-year market fluctuations to implement the Bed & Isa strategy when their investments temporarily dipped in value.
‘If you crystallise a gain when it has dropped, you can Bed & Isa more of it within your annual capital gains tax allowances, and benefit from the market recovery within the tax wrapper.’
Bed & Isa: Investors doing this tend to seek protection as early as possible in the new tax year
How does Bed & Isa work?
It is a useful manoeuvre that lets you move existing investments into an Isa, taking advantage of your current annual £20,000 allowance to protect them from tax in future.
But you do have to weigh up the potential capital gains tax bill on selling your investments and investigate the costs of carrying out the deal.
The process can be carried out by your investing platform, so you don’t have to sell your investments and repurchase them yourself.
Capital gains tax is payable on profits from the transaction, subject to the current rates and annual allowance – but once your investments are inside an Isa they will be protected from the taxman in future.
The deal counts towards your annual Isa allowance of £20,000, but it’s worth considering when you have some left unused.
> What is Bed & Isa
> How does Capital Gains Tax work
Dividend tax rates and allowance explained
Sarah Coles: If you move loss-making assets, you can offset these losses against gains elsewhere
Investors seek protection from tax attacks
Investors have seen a series of adverse tax changes in recent years, explains Sarah Coles.
– Capital gains tax allowance cut from £12,300 to £3,000 a year.
– Dividend allowance cut from £2,000 to £500 a year.
– CGT on stocks and shares hiked from 10 per cent to 18 per cent for basic rate taxpayers and 20 per cent to 24 per cent for higher and additional rate taxpayers
– Dividend tax raised by two percentage points to 10.75 per cent for basic rate taxpayers and 35.75 per cent for higher rate taxpayers.
– Income tax thresholds frozen, so pay rises tip people over thresholds that automatically increase the rate of dividend tax and capital gains tax due on investments outside an Isa or other tax wrapper.
How to use Bed & Isa
‘If you have existing investments sat outside of an Isa wrapper it may be time to consider rehoming them to avoid paying CGT now or down the line,’ says Clare Stinton, of Hargreaves Lansdown.
‘The process involves selling and rebuying within the Isa wrapper, so if any gain exceeds the £3,000 annual threshold – you may be able to offset any losses – you may face a tax bill.’
Stinton says by sticking to the threshold and repeating this process every year you can move all investments into a tax-efficient wrapper.
But for those just starting out on investing, using your Isa and pension allowances from the off will keep your returns out of the taxman’s reach.
Alice Haine, of Bestinvest, says: ‘To complete a Bed & Isa process in full, investors typically need up to 10 days, or even up to four weeks, or longer, for those who first need to migrate share certificates on to a nominee account to sell them.
‘Once the money is loaded into your Isa or pension, however, you can then take your time to make your investment selection.’
She says that because the transaction can happen quickly for a digital transfer, the investor should not miss out on major market moves for too long, but for those holding share certificates the transaction will take longer.
Haine highlights two other ways people can use this investment ploy to protect themselves from tax.
Married couples and civil partners: You can take advantage of ‘interspousal transfers’ and switch assets between each other without triggering a tax charge.
‘This means they can make use of two sets of allowances as part of their Bed & Isa or Bed & Pension strategy, where the shares of funds were originally held in one of their names.
‘The process involves shifting some of the investments to be sold into a spouse’s name before selling, to make use of both sets of CGT exemptions.’
Haine says this can be particularly advantageous if one partner pays a lower rate of income tax, as there is also the potential for them to pay a lower rate of CGT if they exceed their £3,000 allowance.
‘Couples can also make use of two sets of Isa or pension allowances – offering even more scope for a couple to ensure their investments are as tax efficient as possible.’
Bed & Pension: This is a similar transaction for those who want to put investments into a private pension, such as a Self-Invested Personal Pension (Sipp).
‘Contributions attract tax relief at the individual’s marginal income tax rate,’ says Haine. ‘This allows higher and additional-rate taxpayers to claim an extra 20 per cent and 25 per cent in tax relief respectively – on top of the 20 per cent tax relief awarded to basic rate taxpayers.
‘Plus, any money invested not only benefits from compounding over the long term but also grows free of any income and capital gains tax.’
Haine explains that employees can currently contribute up to 100 per cent of relevant UK earnings, up to the £60,000 annual allowance, into their workplace or private pension.
The annual allowance includes your own and your employer’s contributions into a pension, and the tax relief itself.
The rules are more complicated for higher earners, whose annual allowance is tapered down to £10,000.
You can still benefit from any annual allowance left unused over the three previous tax years, under certain conditions – you need to have used the current year’s allowance first, and have set up a pension already to qualify.
Haine says it is important to remember that once money is added to your pension, it cannot be accessed until you are 55 at present, or 57 from April 2028.
> Private pension age will rise to 57
> How does the pensions annual allowance work
Join the discussion
Is it fair that ordinary investors face heavier taxes while trying to protect their hard-earned savings?
Six tips to make the most of Bed & Isas
Sarah Coles of AJ Bell says people should bear the following in mind when using Bed & Isa to protect their investments from taxes.
1. When you sell the assets, you may make a capital gain. It can make sense to focus on realising assets that won’t bust your capital gains tax allowance for this year.
2. Think about your losses too. At volatile times, some investments may have lost value since you bought them.
If you move loss-making assets, you can offset these losses against gains elsewhere when calculating how much capital gains tax is due.
3. If you have both growth and income assets outside your Isa, consider moving the income-producing assets inside first.
The rate on dividends is higher than that on capital gains, and you often have less control over the timing of income than you do over when you realise a gain.
4. Keep an eye on your overall annual £20,000 Stocks and Shares Isa allowance. Bed & Isas will eat into this allowance, so make sure you have enough available.
5. Only investments that are traded on an exchange are eligible. That includes UK-listed and most internationally-listed shares, investment trusts, ETFs and bonds, but not investment funds (OEICs and unit trusts).
6. Although you’ll only pay one dealing charge, other charges linked to buying and selling shares will apply.
These include stamp duty on the repurchase on most UK-listed shares and FX charges on the sale of international shares.
