Investing might be an important part of your client’s long-term financial plan. However, if their investment strategy isn’t tax-efficient, they may retain less of their wealth and this could make it harder for them to achieve their goals.
And with imminent cuts to the annual Dividend Allowance and the Capital Gains Tax (CGT) Annual Exempt Amount set to come into force, now is the time for your client to make the most of their investment profits.
Adopting a “Bed and ISA” strategy could potentially help your clients mitigate tax on their investments.
Indeed, figures published by MoneyWeek showed that Bed and ISA instructions increased by 7% in January 2024 compared to the same period in 2023.
Read on to learn more about what Bed and ISA is, how this investment strategy works, and what the pros and cons could be for your clients.
“Bed and ISA” explained
The term “Bed and ISA” may sound strange. In fact, it’s a variation of the phrase “bed and breakfasting”, which was used to describe the practice of selling off investments at the end of the tax year, crystallising a gain and helping to reduce a CGT bill, before buying the investments back soon after.
The government introduced regulation in 1998 to prevent investors from using this strategy. The “bed and breakfasting rule” requires investors to wait 30 days between selling and buying back the same investment – or use the price they had previously paid for the assets to calculate their CGT liability.
Fortunately, the 30-day rule doesn’t apply to Bed and ISA transactions because any investments added to an ISA wrapper would not be liable for CGT in the future, so this process is distinct from bed and breakfasting.
As a result, this strategy could provide your clients with a means of making their investments more tax-efficient.
How the Bed and ISA process works
As an individual can’t move investments from a taxed account directly into an ISA, your client could use a Bed and ISA strategy to sell their investments and buy them back inside their ISA wrapper.
They can buy their investments back into a Stocks and Shares ISA or a Lifetime ISA (LISA), or split their investments between both – although it’s worth noting that a LISA has an annual limit of £4,000 (2024/25).
However, your client will still be limited by the total annual ISA subscription limit of £20,000 (2023/24 and 2024/25).
Why your client might want to consider using a Bed and ISA strategy
If your client holds investments outside an ISA, for example, in a General Investment Account (GIA), they may be subject to Income Tax, Dividend Tax, and CGT if they breach certain thresholds:
- They may pay CGT on any gains they make if these exceed the Annual Exempt Amount for CGT, which is £6,000 for 2023/24 (falling to £3,000 in 2024/25).
- They may also pay Dividend Tax on any dividends they receive if they exceed their Personal Allowance and the Dividend Allowance, which was cut from £2,000 to £1,000 for the 2023/24 tax year and is set to be reduced from £1,000 to £500 on 6 April 2024.
Conversely, any interest or dividends your client receives from an ISA are free from Income Tax and Dividend Tax, and any profits from investments are free of CGT.
So, if your client is unlikely to use their full ISA allowance before the end of the tax year, they could use a Bed and ISA approach to make their other investments more tax-efficient.
With key tax allowances set to halve on 6 April 2024, this might be an increasingly appealing option for any of your clients who invest.
Furthermore, if your client pays less tax on their investments, they could reinvest more of their money. This may increase the impact of compounding over time and help their investments to grow.
Limitations of a Bed and ISA strategy that your client needs to know
If your client has investments worth more than £20,000, they may need to sell these and rebuy them in an ISA over several tax years, as the annual ISA allowance still applies to Bed and ISA transactions.
Additionally, as a Bed and ISA involves selling shares and then buying them back, the value of your client’s investments could change while they are off the market. This could result in either a gain or a loss. If the gains on the shares they sell are more than their Annual Exempt Amount, they may also have to pay CGT.
Finally, there may be costs and fees attached to a Bed and ISA transaction, such as trading fees, administration fees, Stamp Duty, and transfer fees.
So, when deciding if Bed and ISA is a good choice for them, your client may want to weigh up the tax savings they could make against any potential charges and fees they might incur.
Get in touch
If your client would like help understanding how to use a Bed and ISA to make the most of their annual ISA allowance, we can help.
Please email us at mail@delaunaywealth.com or call 0345 505 3500.
Please note
This blog 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.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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