What are the Bed and ISA rules?


You might think the phrase ‘Bed and ISA’ sounds a little obscure, but it simply refers to the process of selling investments that you’re holding outside of a tax wrapper – and then buying the same ones back within your ISA. It can be used as a way to avoid – or mitigate – capital gains tax (CGT).  In short, by moving your existing investments into an ISA, you get to keep more of what you make.

Bed and ISA and CGT

When you sell investments held in a general investment account or standard trading account, you will pay CGT on any profits above your annual allowance. But by migrating the investments to an ISA, you won’t pay CGT on those profits in the future.

The Bed and ISA rules explained

As an investor, you can hold funds, shares and investment trusts in a general investment account. But growth on your holdings will be subject to tax. Everyone gets a capital gains allowance of £6,000 per year. From April this year (2024), this will drop to £3,000. 

Gains from selling assets are charged at 10% for basic-rate taxpayers, and 20% for higher-rate taxpayers. You are only required to pay these rates on the gains that exceed your CGT allowance. (Under current rules, you get a £1,000 tax-free allowance for dividends, but from April, this will fall to £500).

To make use of your tax-free allowances, you may want to use a ‘Bed and ISA’ strategy. This involves you selling just enough of the assets in your regular investment account or ‘dealing account’ to use up your tax-free allowances, and then buying those same ones back though in ISA. For example, you may have had £30,000 to invest in the previous tax year. You put £20,000 into an ISA and £10,000 into a general investment account. Bed and ISA will allow you to transfer the £10,000 in your general investment account into your ISA.  The Bed and ISA process, as you can see, is a very efficient way of putting taxable investments into a non-taxed environment. 

But doesn’t Bed and ISA fall foul of the ’30-day rule’?

The ’30-day rule’ prevents you from selling shares and repurchasing them the next day to realise a loss. 

Under current HMRC rules, selling shares and immediately buying them back again – within 30 days – doesn’t create a loss for tax purposes. By contrast, selling shares and then purchasing them back into your ISA – via Bed and ISA – does not violate the 30-day rule.

Make use of unused ISA allowances

Bed and ISA is a good way to take advantage of any unused ISA allowance. After all, when it comes to that allowance, it’s a case of ‘use it or lose it.’ Once your existing investments are in an ISA, they will be sheltered from tax.

What to watch out for with Bed and ISA?

When carrying out Bed and ISA, you will incur stamp duty on the repurchase, as well as a dealing charge or trading fee. Be aware that Government stamp duty of 0.5% applies to the repurchase of most shares.

In addition, you will lose the difference between the market purchase price and selling price. As a result, you may end up with slightly fewer shares in your ISA than you had in your trading account. (That said, as the two transactions are carried out together, this should help reduce the exposure to price movements.)

When selling assets, you need to take care not to crystallise the CGT liability before repurchasing them within an ISA. Once your investments are within an ISA, they will then be sheltered from future CGT.

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