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An Individual Savings Account (ISA) is one of the most tax efficient savings vehicles you can find. Within an ISA, any interest earned from cash savings and income from dividends grows free of income tax. Investment gains are also safeguarded from CGT.
Investments held outside of an ISA may be subject to tax.
Currently, the maximum amount that can be invested into an ISA is £20,000 per annum, and this allowance cannot be carried forward into a new tax year. Any unused allowance in this tax year will be lost on 5th April 2024. Because of this, if you have investments held outside of an ISA wrapper, it may make sense to utilise the Bed and ISA transaction.
What is Bed and ISA?
Although it may sound strange, the concept of a Bed and ISA transaction is simple; 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 used to open a new ISA or to top up an existing ISA account. You can buy the same investments back within the ISA wrapper, choose other investments or simply hold the cash within your ISA.
By utilising the Bed and ISA transaction, over the years you will shelter more of your portfolio from tax. This can help to provide tax free income and reduce your CGT bill in future years.
Capital Gains Tax
It should be noted 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 £6,000 in the 2023-24 tax year (NB this allowance will be cut to £3,000 in the 2024-25 tax year). If you make a loss, this could be offset against any other capital gains you may make in this or future years.
Taxation of gains above the annual allowances is currently charged at 10% for Basic Rate taxpayers and 20% for Higher Rate taxpayers.
In addition, UK investors using the Bed and ISA transaction do not have to wait 30 days before acquiring the same share or same class of a specific fund as they would if selling and repurchasing shares outside of the ISA wrapper.
As with any investment, there will be costs involved if you use the Bed and ISA strategy. These will typically include dealing fees, stamp duty, platform charges and a fund switching cost or initial charge. Although costs are an essential consideration, over the long term, the tax advantages of holding investments within an ISA will likely outweigh the charges.
In addition, even though the Bed and ISA process is quick, there is a risk that any time out of the market could have a detrimental impact on your investments. Shares are usually sold and repurchased simultaneously to limit potential price movement, but the sale and repurchase of funds can take a few days.
Ready to make the most of this year’s ISA allowance?
If you would like to find out more about Bed and ISA or to make the most of this year’s ISA allowance, please speak to your Wealth Planner or visit: www.successionwealth.co.uk/contact-us and one of the team will be in touch.
Please note: This article 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. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation and legislation after the time of publication may impact on the accuracy of the article.
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.