An increasing number of investors are using the Bed & Isa Gambit to protect their assets ahead of a tax coup in April, industry figures show.
This oddly named maneuver involves selling and buying back investments held outside an Isa into a new or existing Isa, with the tedious trading business handled for you by your investment platform.
Demand for the service is expected to continue to rise ahead of a major cut in the spring to capital gains tax, which will see it fall from £6,000 to £3,000.
Meanwhile, the tax-free allowance for dividends will be reduced from £1,000 to £500.
Bed & Isa: This involves selling and buying back investments that are outside an Isa into a new or existing one
CGT and dividend payments have already been halved last April, from £12,000 and £2,000 respectively, which has focused investors’ attention on securing some or all of their wealth in the safety of shares Isa.
But you will need to weigh the potential CGT bill when selling your investments and investigate the costs of the transaction.
In addition, due to trading and time commitments, you may not leave a Bed & Isa until just before the end of the tax year. See below how Bed & Isa transactions work and what you should first take into account.
> How to choose the best (and cheapest) stocks and shares Isa and the right DIY investment account
Online DIY investment site Interactive Investor says it has already seen a 7 percent increase in the number of Bed & Isa applications in January compared to the previous year.
This follows a peak of 53 percent in 2023 compared to the previous year.
“Shrinking capital gains and dividend tax exemptions are giving investors the impetus to invest through a tax-efficient wrapper if they haven’t already done so,” said Myron Jobson, senior personal finance analyst at II.
‘Shipping investments into an ISA protects future profits and dividends from the clutches of tax. The process is known as Bed & Isa and is a valuable tool as part of a wider spring cleaning strategy.
“However, the transfer will involve selling and buying back shares, which could result in a capital gains tax bill.”
Graham Brodie, wealth planner at Succession Wealth, says: ‘An Isa is one of the most tax-efficient savings instruments you can find. Within an Isa, all interest earned from savings and dividend income grows free of income tax. Investment gains are also protected from CGT.
‘Investments held outside an Isa may be subject to tax. Currently, the maximum amount that can be invested in an Isa is £20,000 per year, and this allowance cannot be carried over to a new tax year. Any unused credit in this tax year will expire on April 5, 2024.
‘If you have held investments outside of an Isa wrapper, it may therefore make sense to use 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 profit levels over three tax years.
What should you consider before taking out a Bed and Isa deal?
Graham Brodie of Succession Wealth offers the following tips.
1) The Bed & Isa process: Each tax year, existing investments are sold up to the value of any unused Isa balance (the ‘bed’ part of the transaction) and the proceeds used to open a new Isa or top up an existing Isa account.
You can buy back the same investments in the Isa package, choose different investments or simply keep the money in your Isa
Over the years, you protect more of your portfolio from taxes. This can help generate tax-free income and reduce your CGT bill in years to come.
2) Capital Gains Tax: When you sell your investments to start a Bed & Isa transaction, you may have to pay CGT if your gain for the year exceeds the annual allowance – currently £6,000 in the 2023-2024 tax year. This allowance will be reduced to £3,000 in the 2024-2025 tax year.
If you make a loss, this can be offset against any other capital gains you may make in this or future years.
Tax on winnings in excess of annual fees is currently 10 percent for basic rate taxpayers and 20 percent for higher rate taxpayers.
Furthermore, UK investors using the Bed & Isa transaction do not have to wait 30 days before acquiring the same share or class of a specific fund, as they would if they were selling and redeeming shares outside the Isa wrapper.
3) Other costs: If you use the Bed & Isa strategy, there are costs involved. These typically include transaction fees, stamp duty, platform fees and fund switching or origination fees.
Although costs are a key consideration, the tax benefits of holding investments in an ISA are likely to outweigh the costs in the long term.
4) Time out from the market: Even though the Bed & Isa process is fast, there is a risk that any time out from the market will have an adverse effect on your investments.
Shares are typically sold and redeemed simultaneously to limit potential price movements, but sales and redemptions of funds may take several days.
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