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Key tax allowances are set to halve in April 2024, which will have a financially punishing knock-on effect for some stocks and shares investors.
That’s where ‘Bed & ISA’ transactions come in, as a potentially tax-efficient option that allows investors to hang onto more of their money.
Tax treatment depends on one’s individual circumstances and may be subject to future change. The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of tax advice.
Bed & ISA is the process of selling an investment you hold, and buying it back within a stocks and shares Individual Savings Account (ISA).
The manoeuvre could cut your tax bill, since investments held within a stocks and shares ISA are liable for neither capital gains tax, nor dividend income tax (see below).
Here’s a breakdown of how the Bed & ISA process works, why an investor might consider doing it, and what it could cost.
Moving investments to a tax-free wrapper
‘Bed & ISA’ describes the process of selling off investments held outside an Individual Savings Account.
It involves repurchasing investments within an ISA wrapper to shelter any income or growth they produce from tax. In the UK, each individual can deposit up to £20,000 per tax year into ISAs.
Investments held in a stocks and shares ISA are sheltered from:
- capital gains tax (CGT) – if you sell an asset for a higher price than you paid for it, you may become liable to pay CGT on the profit. For the 2023-24 tax year, individuals can earn up to £6,000 by selling assets before CGT kicks in.
From the 2024-25 tax year starting on 6 April 2024, however, this halves to £3,000.
Above this threshold, capital gains are taxed at 10% for basic rate taxpayers, and 20% for higher and additional rate taxpayers.
- Dividend income tax – dividends are profit-sharing payments that some companies make to shareholders, either annually or half-yearly.
Individuals can earn up to £1,000 in dividends each tax year without needing to pay tax. For the 2024-25 tax year, this allowance drops to £500. Any dividend earnings over this limit are taxed at 8.75% (basic rate), 33.75% (higher rate), or 39.35% (additional rate).
With the 2023-24 tax year coming to an end on 5 April, investors who want to make use of Bed & ISA should do so soon, since the transaction can take up to 10 working days to complete (more on this below).
The term Bed & ISA is a variation of the phrase ‘Bed & Breakfasting’, which was used to describe the practice of selling off investments near the end of a tax year, before buying them back the next day.
This technique allowed investors to reduce their tax bill by taking advantage of their CGT allowance, without having to change their portfolio.
To discourage Bed & Breakfasting, regulation was introduced in 1998 requiring investors to wait 30 days between selling and buying back the same investment.
This 30 day rule does not apply to Bed and ISA transactions, however. When you sell an investment and buy it back within an ISA wrapper, the transaction is viewed as moving it from one place to another.
Bed and ISA benefits
By using Bed & ISA transfers, UK investors could shield more of their portfolio from CGT and dividend income tax.
With less tax to pay, more of your money can be reinvested into the market, which could increase the impact of compounding over time – helping your nest egg grow faster.
Graham Brodie, wealth planner at Succession Wealth, said: “By utilising the Bed and ISA transaction, over the years you will shelter more of your portfolio from tax. This can help provide tax-free income and reduce your CGT bill in future years.”
Even if you haven’t exceeded your CGT or dividends allowance in previous tax years, shrinking allowances mean you may be liable soon.
Changes to capital gains and dividend allowances
In this environment, Bed & ISA transactions could become more commonplace. The investing platform Bestinvest, for instance, said it received 131% more Bed & ISA instructions in February 2024 compared with February 2023.
Rival platform interactive investor also said the number of Bed & ISA requests made by its customers rose 53% between 2022 and 2023.
Laura Suter, director of personal finance at AJ Bell, says: “If you have too many investments to move them all in one tax year, you should prioritise the ones paying the highest amount of dividends.”
For investors who have used up their ISA allowance in the current tax year, it could be a strategy worth considering further down the road.
Andrew Mangion, global head of tax at Saxo Bank, says: “Bed & ISA is a good way to take advantage of a good-value stock now, then place it into a tax-efficient product in future years where you may not have used your full ISA allowance.”
Another advantage of the Bed & ISA process is that, often, investment platforms allow customers to sell and buy back a number of investments for the price of a single transaction.
Bed & ISA drawbacks
While the Bed & ISA process can be a useful way to get the most out of your ISA allowance and make investing more tax efficient, there are some limitations to bear in mind.
First, only investments that are listed on the UK stock market, and traded in sterling, can be transferred to a stocks and shares ISA within a single Bed & ISA transaction.
If you wish to move other investments into a stocks and shares ISA, you’ll need to sell and repurchase them through two separate transactions, and will likely be charged for each one.
Along with any dealing fees, Bed & ISA transactions incur Stamp Duty, which is charged at 0.5% on the purchase of UK shares. This tax is usually incorporated into the price offered by investing platforms.
Since most platforms charge a buy-sell spread – the difference between the price it charges when you buy an asset, and the price it offers when you sell it – you could also end up with slightly fewer shares in your ISA than you held in your dealing account.
Another consideration is CGT. Investments held in a stocks and shares ISA are shielded from CGT, but you may still be liable when selling off investments as part of a Bed & ISA transaction.
If the investment has risen in value since you bought it, and you’ve exceeded your annual CGT allowance, you’ll need to pay any tax you owe on the profits.
Finally, if you have already used up your £20,000 ISA allowance for the current tax year, you will be unable to use Bed & ISA transactions until the allowance resets on 6 April.
How to use Bed & ISA
If you hold a dealing account and stocks and shares ISA with the same provider, the Bed & ISA process should be fairly straightforward.
It can often be completed online, by logging into your chosen investment platform, navigating to your dealing account, and selecting the Bed & ISA option.
Next, you’ll be prompted to select which investments you would like to sell and buy back within the ISA. The deal should be placed within 10 working days, and you’ll be charged a dealing fee at your standard rate.
Different providers have different processes, and you may need to call customer services to complete a Bed & ISA transaction.
As mentioned above, this all-in-one transaction can only be used with UK-listed investments held in sterling.
If your dealing account and ISA are held with separate providers, you’ll need to sell off the investments you want to transfer and withdraw the proceeds before you can re-purchase them in your stocks and shares ISA.
Bed & Pension
A similar process, known as ‘Bed & Pension’, can be used to transfer investments into a tax-efficient pension wrapper.
Each individual receives tax relief on pension contributions up to £60,000 or 100% of their qualifying income , whichever is lower, each tax year.
Alice Haine, personal finance analyst at Bestinvest, advises: “Don’t leave it too late – ISA and SIPP providers will have a cut-off point for Bed & ISA and Bed & Pension transactions at tax year end to allow enough time for the process to complete.
“Transfers can take up to 10 days or longer so starting the process sooner rather than later is a good idea.”
