An Individual Savings Account (ISA) is one of the most tax-efficient savings vehicles available. Essentially, an ISA acts as a “wrapper” that allows investments within it to grow free from income tax and Capital Gains Tax (CGT). Investments held outside of an ISA may be subject to these taxes.

The maximum amount that can be invested into an adult ISA is currently £20,000 per annum. This allowance cannot be carried forward into a new tax year, so any unused ISA allowance for this tax year will be lost on 5th April 2025. Therefore, if you have investments outside of an ISA, it may be beneficial to utilise the Bed and ISA transaction.

What is Bed and ISA?

Although it may sound unusual, the concept of a Bed and ISA transaction is straightforward. Each tax year, existing investments up to the value of any unused ISA allowance (the “Bed” part of the transaction) are sold, and the proceeds are used to open a new ISA or top up an existing ISA account. You can then buy back the same investments within the ISA wrapper, choose other investments, or simply hold the cash within your ISA.

Additionally, UK investors using the Bed and ISA transaction do not have to wait 30 days before reacquiring the same share or class of a specific fund, as they would if selling and repurchasing shares outside of the ISA wrapper.

Capital Gains Tax

By utilising the Bed and ISA transaction, you can gradually shelter more of your portfolio from tax, providing tax-free income and reducing your CGT bill in future years. However, be aware that when you sell your investments to begin a Bed and ISA transaction, you may have to pay CGT if your gains for the year exceed the annual allowance, currently £3,000. From 30th October 2024, gains above the annual allowance are taxed at 18% for Basic Rate taxpayers and 24% for Higher Rate taxpayers. If you incur a loss, it can be offset against other capital gains in this or future years.

Considerations

As with any investment strategy, there are costs involved in using the Bed and ISA approach. These typically include dealing fees, stamp duty, platform charges, and fund switching costs or initial charges. While costs are an essential consideration, the long-term tax advantages of holding investments within an ISA are likely to outweigh these charges.

Even though the Bed and ISA process is quick, there is a risk that any time out of the market could negatively impact your investments. Shares are usually sold and repurchased simultaneously to limit potential price movements, but the sale and repurchase of funds can take a few days.

Don’t delay – if you want to utilise the Bed and ISA strategy you need to act before the end of the tax year

Utilising the Bed and ISA strategy can help you make the most of the tax-efficient investment opportunities available and ensure you do not pay more tax than necessary.

Please contact us if you require more information about this or any other aspect of your financial planning.

Please note:

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

The content was accurate at the time of writing, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.

This information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change and tax implications will be based on your individual circumstances.

The value of your investment(s) and the income derived from it, can go down as well as up and you may not get back the full amount you invested.

FP2024-484 – this content was last updated in November 2024