‘Bed and ISA’: A smart way to protect future gains from the tax man

Investors have battled a triple threat of hikes in Capital Gains Tax (CGT) rates, huge cuts to the tax-free allowances for capital gains and dividend income, and frozen tax bands. Not only will they pay more tax on their existing gains and investment income outside of ISA, but more investors have been pushed into a higher tax bracket and rates of tax on their holdings.

It’s therefore no surprise that Bed and ISAs remain a popular option for investors as we enter peak ISA season. Investors can use a Bed and ISA to lock in capital gains up to the annual tax-free limit of £3,000 and move income-producing investments into the ISA tax wrapper to shield against the lower dividend allowance (now £500).

A Bed and ISA transaction is where an investment is sold in a Dealing account and then repurchased in an ISA. The transactions are carried out at the same time by your platform, meaning you’ll only pay one dealing charge and you’re less exposed to market movements. If you sell and move the cash proceeds yourself and buy the investment again, you will face two dealing charges.

When is the most popular time to do a Bed and ISA?

Most Bed and ISA activity amongst AJ Bell customers happens in the first two weeks of a new tax year. The number of transactions for the first two weeks of the 2024/25 tax year make up 30% of the transactions for 2024/25 so far and were 18% higher than the same two weeks in April 2023. Savvy investors continued to get their ducks in a row and use the new (lower) allowance early in the year, but the political landscape was also shifting and a general election, although not called until May, was expected later in 2024.

Whilst the new Labour government pledged not to raise taxes on working people, that moved wealth and capital gains firmly into the chancellor’s sights in her October Budget. That would explain a jump of 312% in the number of Bed and ISA transactions in October 2024 compared with the year before.

Source: AJ Bell

What should investors consider before carrying out a Bed and ISA?

When you place a Bed and ISA deal, keep an eye on how much of the overall £20,000 ISA allowance you have left. You’ll also have to pay CGT on your gains over the annual tax-free amount (£3,000 for 2024/25).

Only investments traded on an exchange are eligible for a Bed and ISA. That includes UK-listed and most internationally listed shares, investment trusts, ETFs and bonds, but not investment funds (OEICS and unit trusts).

Although you’ll only pay one dealing charge, other charges linked to buying and selling shares will apply. For example, this would include stamp duty on the repurchase on most UK-listed shares and FX charges on the sale of international shares.

If you’re considering repositioning your portfolio or your overall asset allocation, then you’re unlikely to use a Bed and ISA if you want to buy different investments with the sale proceeds.

Whatever your end goal, using your CGT allowance and sheltering more investments into tax-free wrappers is good tax planning, no matter the political backdrop.