Increasing numbers of investors are making use of a tax trick where they can move their current investments into an Isa and protect their assets from the taxman.
The process is known as “Bed and Isa” and comes as many wealthy savers are worried about a potential capital gains tax raid under the new Labour government.
Here, Telegraph Money explains how the process works, and who can benefit from it.
Bed and Isa is the process that’s required if you want to move your investments from a general investment account into an Isa. The main reason to do this is to protect your investment gains from tax.
Many people will hold funds or shares in a general investment account, which means the money is held outside of an Isa.
But the reduction of capital gains and dividend allowances in recent years means there is a risk of profits from these investments being subject to tax.
This risk has increased recently after the capital gains and dividend tax-free allowances halved at the start of the tax year in April to £3,000 and £500 respectively.
The Bed and Isa process involves selling an investment held outside an Isa, and then purchasing the same asset back within the tax wrapper, so any future gains are tax-free.
There may still be gains to pay on the profits when selling, but some investors may want to move their money before allowances are reduced further.
Jason Hollands, managing director of Bestinvest, said: “If you are concerned that capital gains tax (CGT) is going to rise in the future, it may be better to take a relatively modest tax hit now to get your investment tucked away tax efficiently for the future.”
Bestinvest is also seeing evidence of investors taking gains before the end of the tax year and moving them into an Isa ahead of any tax changes under Labour.
Mr Hollands added: “We have seen wealthy clients accelerate the sale of businesses and second properties, and some clients are also choosing to Bed and Isa shares and funds ahead of Labour’s first Budget. Making sure existing investments are held tax efficiently makes sense whatever may or may not happen with CGT.”
The main advantage of the Bed and Isa process is that you move investments from a taxable to a non-taxable environment.
Holly Mackay, founder at Boring Money, said: “At a time when tax is hurting us all more, it shelters us from what I think are inevitable increases in capital gains tax, as well as dividend tax.”
There are other cost and administrative benefits as well.
Investors will typically only pay one transaction fee for both the sale and purchase into a Bed and Isa, rather than separate costs. This can vary depending on the investment platform and type of asset.
For example, AJ Bell charges £1.50 for fund dealing and £5 for shares, but says investors will only be charged one fee in most cases where the deal takes place at the same time, rather than paying for a sale and repurchase.
There will also be stamp duty to pay when rebuying shares.
Bestinvest charges a £4.95 dealing fee for UK share sales and purchases – charged at both stages of the transaction – but nothing for funds and US equities.
Mr Hollands added: “The costs of effecting a Bed and Isa are small and will be more than outweighed by the long-term benefits of keeping your investments out of the grasp of the taxman, both in terms of any dividends or interest received in the future, and any potential capital gains tax as your investments grow over time.”
The process of setting up a Bed and Isa will depend on the investment platform. Your investment platform will usually have a Bed and Isa option to take you through the process.
The first step will be selling the investment currently held in your general account and keeping a note of any capital gains tax owed to HMRC.
You then need to wait for the funds to be available, which can take a few days, and transferred into your Isa.
Once the money is in your Isa account, it can be used to purchase the same investments or assets of your choice within the tax wrapper.
Investment platforms have reported a rise in Bed and Isa transactions, but while many investors typically use this technique at the end of the tax year to make use of their full £20,000 tax-free savings allowance, others are moving earlier due to reduced investing allowances and in case Labour tinkers with CGT.
It comes as a Freedom of Information request made by AJ Bell last year revealed that HMRC expects 1.8 million more people to fall into paying dividend tax for the first time since the initial cuts to allowances last April, with a further 260,000 new recipients of a tax bill for their capital gains.
This is compounded by former chancellor Jeremy Hunt freezing personal tax allowances for income tax until 2028, a policy that the Labour government is expected to continue.
Investment platform AJ Bell says its Bed and Isa transactions went up by 17pc annually in April compared with last year.
Laura Suter, director of personal finance at AJ Bell, said: “Investors have been clobbered from two sides.
“They’ll pay more tax on their existing gains and investment income, but more investors will also be pushed into a higher tax bracket and so face a higher rate of tax on those investments.”
The cost of a Bed and Isa will depend on the investment platform. There may be dealing fees, plus you will also have to pay stamp duty when purchasing shares.
Selling your investments may also incur a capital gains tax charge, depending how much profit you made.
Moving shares into an Isa can be beneficial as you can take any dividend payments free of tax without worrying about breaching the allowance. That is especially useful as the dividend allowance has been slashed in recent years and is currently just £500.
Similarly, moving your shares into an Isa can protect your future gains from the taxman if you wanted to sell.
The capital gains allowance halved in April 2024 to £3,000, but any profits on investments held in an Isa are tax-free.
There are charges to be aware of when using the Bed and Isa process. This includes potential CGT, plus there may be dealing fees on the sale and purchase.
It may be more expensive to buy back the stock if the share price rises between the time you sell the asset and are ready to repurchase it.
The money transferred must also still be within your £20,000 annual Isa allowance.
Ms Mackay added that you also may miss out on market gains while you are waiting for sale and repurchase to go through.
She said: “If the S&P surges ahead or your shares announce some great news, for example, you will miss out on any gains.
“This risk of course becomes more material the more money you have.”
2024-07-22T13:02:44Z dg43tfdfdgfd