Could a “Bed and ISA” strategy could help you invest tax-efficiently this year?

17 April 2024

Now that the 2024/25 tax year has begun, it is important to be aware of several changes to specific tax regimes that have come into force.

Notably, the government has reduced both the Capital Gains Tax (CGT) Annual Exempt Amount and the Dividend Allowance as of 6 April 2024, potentially leading to a greater overall tax liability for investors around the UK. You can read detailed insights into the changes on our news page.

As a result of these squeezes, many investors are searching for a way to mitigate their tax burden.

One strategy many savvy investors deploy is called “Bed and ISA”, which involves the strategic use of Individual Savings Accounts (ISAs) for greater tax efficiency when investing.

Let’s take a closer look at why investors’ tax bills could be rising, how the Bed and ISA strategy works, and why it could be a suitable move if you’re looking to mitigate your tax liability this year.

Non-ISA holdings are often liable for Capital Gains Tax and Dividend Tax

When you buy stocks and shares outside of an ISA, any profits you earn from these investments could be liable for CGT and any dividends you earn could be liable for Dividend Tax.

You’re normally liable for CGT on profits you earn on non-ISA shares, property that is not your main home, and business assets.

In April 2024, the government reduced the CGT Annual Exempt Amount, under which you can earn profits tax-free, to £3,000 (down from £6,000 in the previous year and £12,300 the year before).

For higher- and additional-rate taxpayers, the rate of CGT stands at 20% for non-property profits, and 24% for profits on some property sales, including buy-to-lets and second homes.

Similarly, if you have dividend-paying holdings, you may be aware of the Dividend Allowance, under which you pay no tax on some of the dividends you earn.

As of the 2024/25 tax year, the Dividend Allowance now stands at £500, reduced from £1,000 in 2023/24 and £2,000 in 2022/23.

You may pay Dividend Tax in line with your marginal rate of Income Tax, as follows:

• 8.75% if you are a basic-rate taxpayer
• 33.75% if you are a higher-rate taxpayer
• 39.35% if you are an additional-rate taxpayer.

In combination, these changes to both tax regimes could mean you reap fewer benefits when you dispose of assets.

This could be from selling you’re a property that isn’t your main home, earning dividends from stocks you hold, or selling a portion of your investment portfolio on retirement – in any case, you may wish to mitigate your CGT and Dividend Tax liabilities if possible.

The Bed and ISA strategy involves selling non-ISA investments and buying them again within an ISA

Introduced by the government in 1999, the Stocks and Shares ISA allows you to invest your money without any gains being subject to CGT or any dividends becoming liable for Dividend Tax.

As of the 2024/25 tax year, you can pay up to £20,000 a year into your Stocks and Shares ISA (this allowance is spread across all adult ISAs, including Cash ISAs).

If you have several non-ISA holdings that may attract a tax bill this year, you could consider employing a Bed and ISA strategy. Here’s how it works:

• An investor sells any non-ISA shares that are vulnerable to CGT or Dividend Tax
• They then immediately buy the same set of shares again; except this time, they purchase the holdings within a Stocks and Shares ISA
• The investments are then able to see the same growth as they would have outside of the ISA, but with the added benefit of tax efficiency.

Of course, the overall benefit of Bed and ISA is that you could transfer part of your investment portfolio into a tax-efficient vehicle.

But remember, there could be some potential downsides to Bed and ISA too, including:

• You could incur a tax bill when initially disposing of non-ISA assets
• There may be fees and charges for selling and buying shares
• If you own more than £20,000 of shares the amount you can hold within an ISA will be limited by the ISA subscription limit (2024/25)
• There may be some risk of capital loss if you do not immediately re-purchase the same assets within a Stocks and Shares ISA.

Many investment account and ISA providers offer a Bed and ISA option as part of their service, meaning that it is unlikely that you’d have to complete the Bed and ISA transfer yourself.

It is important to note that completing a Bed and ISA transfer is only possible within the ISA contribution limit, which stands at £20,000 across all the accounts you hold.

As such, considering this move at the beginning of the tax year might be constructive, as it allows you to make the most of your tax-efficient investment allowance.

Speak to an independent financial planner before actioning your Bed and ISA plans

Remember that not all financial strategies are helpful for everyone, so it may be worth discussing your ideas with a financial planner before opting for a Bed and ISA strategy.

We can:

• Look at the potential tax liability your non-ISA holdings are set to attract
• Help you organise a smooth Bed and ISA transfer
• Create a comprehensive financial plan that looks at the tax efficiency of all your wealth, not just your investment portfolio.

To speak to an independent financial planner, email info@depledgeswm.com or call 0161 8080200.

Please note

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

All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate tax planning.

Levels, bases of, and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

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.