Tax hikes ahead: Why you should consider a Bed & Isa now to cash in on capital gains before the surcharge is cut on April 6
Investors looking to protect an existing portfolio from tax may be able to do so using a process known as Bed and Isa. But experts warn that they should put on their skates.
Doing a Bed and Isa transfer now before the new tax year can save some investors with sizeable portfolios hundreds of pounds.
Not only does this process ensure that your investments end up in the tax-free wrapper of an Isa share, but it also means you can take advantage of the capital gains tax deduction this year before it drops on April 6.
Transfer time? Making a Bed and Isa transfer now for the new tax year can save some investors hundreds of pounds
What is a Bed & Isa?
The esoterically named Bed and Isa process involves transferring investments held outside of a tax wrapper to an Isa. This means that any future investment growth is protected from taxation.
Most investment platforms will do this on your behalf, so you don’t have to sell all your positions one by one yourself and then buy them all again.
Bed and Isa transfers have exploded in popularity in recent months, since the capital gains tax (CGT) and dividend tax deduction reductions were announced by Chancellor Jeremy Hunt in last November’s Fall Statement.
The CGT fee will be reduced from £12,600 to £6,000 from 6 April and then again to £3,000 in April 2024.
The dividend tax deduction drops from £2,000 to £1,000 and then to £500 in April 2024.
Why it might make sense for Bed & Isa now
If you move your portfolio through a Bed and Isa transfer, you may have to pay capital gains tax on any gains.
But once safe in your Isa, any future profits and dividends are tax-free.
Importantly, by switching before the new tax year, you will benefit from the higher capital gains tax deduction of £12,300. This can make a significant difference to those with big profits or portfolios built outside of Isa stocks.
Bed and Isa transfers add to your Isa allowance. But as most people are unable to save or invest the full £20,000 annual Isa allowance in new money, a Bed and Isa can help use up a portion that would otherwise go unused.
How a Bed & Isa could bear fruit
The annual capital gains tax-free allowance will be reduced from £12,300 to £6,000 when the new tax year begins on 6 April 2023. It will then drop even further to just £3,000 from the 2024 tax year.
Currently, a higher rate taxpayer making a capital gain of £15,000 would pay tax on just £2,700 of that gain, leaving them with a bill of £486.
But if they made the same profit after April 6, 2023, they would be liable to tax on £9,000 of their winnings, equating to a tax bill more than three times that of £1,620.
The dividend tax-free allowance will also be reduced, from £2,000 to £1,000 from 6 April. It will then be halved again to just £500 from the 2024 tax year.
An investor with a higher tax rate who receives £2,000 in dividends each year would not currently pay tax on their investment income.
From 6 April they would face tax on the £1,000 of their dividend above the new £1,000 tax-free allowance and lose £337.50 in tax.
Reinvested dividends compounded over the years are one of the main drivers of total returns in the stock market, so protecting them in an Isa allows the gains to pile up while taxes are hammered on.
Don’t wait until the last minute
If you are planning to do a Bed and Isa then it is important to take enough time to sell and buy back investments.
This is all the more important as the end of the tax year approaches, as missing the deadline can result in a larger capital gains tax bill.
Jason Hollands, director of investment platform Bestinvest, says: ‘Don’t let it be too late.
“The process will take a few days because the sale of your existing investments will take some time to complete before the funds are available.”