As they hit record levels, could a “Bed and ISA” strategy benefit you?

Senior couple reviewing finances on laptop

It may sound strange, but “Bed and ISA” is an increasingly popular strategy that could help you make the most of your investments by ensuring that you’re not paying unnecessary tax.

Indeed, research published by interactive investor has revealed that 2023 was a record-breaking year for Bed and ISA requests, which increased 53% compared to 2022.

Read on to find out what “Bed and ISA” is, how it works, and the benefits this investment approach could offer you.

Bed and ISA offers a tax-efficient way to invest

Before exploring how Bed and ISA works, it might be helpful to have an understanding of the tax benefits you could gain from maximising your annual ISA contributions.

Your ISA allowance

ISAs offer a tax-efficient way to save as any interest or returns you earn are free from Income Tax and Capital Gains Tax (CGT).

In the 2023/24 tax year, you can put up to £20,000 into your ISAs. There are four main types of adult ISA, and you can spread your savings across these different types.

Currently, you can’t pay into multiple ISAs of the same type during a single tax year. However, from 6 April 2024, multiple subscriptions to ISAs of the same type and partial transfers will be allowed.

Stocks and Shares ISAs – and potentially Lifetime ISAs – are the most relevant to the Bed and ISA process.

If you don’t use your full ISA allowance during the tax year, you’ll lose it. So, you might be interested to learn how a Bed and ISA could help you make the most of your allowance – without finding extra cash to top it up before the tax year ends on 5 April 2024.

How Bed and ISA works

Any investments held outside an ISA – such as in a General Investment Account (GIA) – may be subject to CGT when you dispose of them, as well as Income Tax on dividends, if they breach the thresholds.

The Annual Exempt Amount for CGT is currently £6,000 but it will be reduced to £3,000 in the 2024/25 tax year.

The Dividend Allowance has already been cut from £2,000 to £1,000 for the 2023/24 tax year and it will be halved again, from £1,000 to £500, on 6 April 2024.

So, investing through a tax-efficient wrapper may be an increasingly attractive option.

Fortunately, the Bed and ISA strategy allows you to sell some of your investments and rebuy them in your ISA to protect them from tax. You can split your investments between a Stocks and Shares ISA and a Lifetime ISA (LISA), but remember that the amount you can put into LISA is limited to £4,000 each year.

The ISA allowance still applies when you carry out a Bed and ISA, so your transactions can’t exceed £20,000 (2023/24).

Also, the rules don’t allow you to transfer assets directly. So, the “Bed and ISA” process involves selling the stocks and shares you hold outside your ISA and subsequently buying them back within your ISA.

In simple terms, after a Bed and ISA transfer, you end up with the same investments, but they are now held in your tax-efficient ISA wrapper.

The potential benefits of the Bed and ISA strategy

One advantage of using a Bed and ISA approach is that you can use existing investments to make full use of your annual ISA allowance.

If you don’t want to find extra cash to put in your ISA and you have accumulated or inherited investments outside your tax wrapper, you could sell these stocks and shares and rebuy them in your ISA to take advantage of your £20,000 allowance.

In addition, you do not pay Income Tax on the interest and dividends you receive from ISA investments. Also, any profits are free of CGT.

Furthermore, keeping your investments in one account could make them easier to keep track of.

Potential limitations of the Bed and ISA approach

If you’re considering this approach, remember that you’re still limited by your ISA allowance. So, you can’t invest more than £20,000 (2023/24) in a single tax year using Bed and ISA.

If the value of your non-ISA investments is more than this, you may have to sell and rebuy them inside an ISA over several tax years.

Additionally, while CGT is not charged on funds held in an ISA, if the shares you sell as part of the Bed and ISA process have produced gains above your Annual Exempt Amount, you may have to pay CGT.

You should also bear in mind that, while you’re carrying out a Bed and ISA transaction, your stocks and shares will be off the market. So, the value of your shares could change between you selling them and buying them back in an ISA.

Finally, there might be costs involved in selling shares and rebuying them in an ISA, include trading fees, administration fees, Stamp Duty, and transfer fees.

Get in touch

A financial planner can help you understand if a Bed and ISA is a good option for you and ensure that you adhere to the rules.

If you’d like to learn more about Bed and ISA transactions, we can help.

To find out more, please get in touch. Email or call us on 01454 416653.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

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