How Bed & Isa can protect you from the looming tax raid
A growing number of investors are using the Bed & Isa maneuver to protect their assets ahead of a tax takeover next April, industry figures have revealed.
This oddly named maneuver involves selling investments held outside an ISA and buying them back inside a new or existing investment, with the tedious trading work handled for you through your investment platform.
Demand for this service is expected to continue to rise ahead of big spring cuts to the capital gains tax allowance, taking it down from £6,000 to £3,000.
Meanwhile, the tax-free earnings allowance will be reduced from £1,000 to £500.
Bed and Isa: This involves selling investments held outside the Isa and buying them back inside a new or existing one
CGT and dividend allowances were already halved last April, from £12,000 and £2,000 respectively, focusing investors’ minds on putting more or all of their wealth in safety. Stocks and shares Isa.
But you should evaluate the potential CGT bill when you sell your investments and check the transaction costs.
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 to find out 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 investment account
Online investment website Interactive Investor says it has already seen a 7 per cent increase in Bed & Isa applications in January compared to the previous year.
This comes after a 53 percent rise in 2023 compared to the previous year.
“Shrinking capital gains and dividend tax allowances provide an incentive for investors to invest through a tax-efficient wrapper if they haven’t already,” says Myron Jobson, senior personal finance analyst at II.
“Transferring investments into an Isa protects future gains and profits from the clutches of tax. Known as a Bed & Isa, this process is a valuable tool as part of a wider spring cleaning strategy.
“However, the transfer will involve the sale and repurchase of shares, which may 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 vehicles you can find. Within an Isa, any interest earned from cash savings and income from dividends grows free of income tax. Investment gains from CGT.
‘Investments held outside the scope of 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 forward into a new tax year. Any unused allowance in this tax year will be lost on April 5, 2024.
“For this reason, if you have investments held outside of an ISA, it may make sense to take advantage of a Bed & Isa deal.”
What impact will the changes to CGT and dividend tax have on investors?
Interactive Investor looks at how changes affect different profit levels across three tax years.
What should you consider before embarking on a Bed and Isa deal?
Graham Brodie from Succession Wealth offers the following advice.
1) Bed and Issa process: Each tax year, existing investments up to the value of any unused Isa allowance are sold (the ‘bedding’ part of the transaction) and the proceeds are used to open a new Isa or top up an existing Isa.
You can buy back the same investments within an Isa wrapper, choose other investments or simply keep the cash in your Isa
Over the years you will protect more of your portfolio from taxes. This can help provide tax-free income and reduce your CGT bill in future years.
2) Capital gains tax: When you sell your investments to trigger a Bed & Isa transaction, you may have to pay CGT if your profits for the year exceed the annual allowance – currently £6,000 in the 2023-24 tax year. This allowance will be reduced to £3,000 in the tax year 2024-25.
If you make a loss, this can be offset against any other capital gains you may make this year or future years.
Gains in excess of annual bonuses are currently taxed at 10 percent for basic taxpayers and 20 percent for higher-rate taxpayers.
In addition, UK investors using a Bed & Isa transaction do not have to wait 30 days before acquiring the same share or the same category of a particular fund as they do if they sell and buy back shares outside of the Isa.
3) Other costs: There will be costs if you use a Bed & Isa strategy. These will typically include handling fees, stamp duty, platform fees, money transfer cost or initial fees.
Although costs are a key consideration, in the long term, the tax benefits of holding investments within an ISA are likely to outweigh the fees.
4) Time to exit the market: Although 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.
Stocks are usually sold and repurchased simultaneously to limit potential price movement, but selling and repurchasing funds can take a few days.
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(tags for translation) Daily Mail