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Bed and ISA: What is it? And should you do it?

Karl 3rd Apr 2023 No Comments

Reading Time: 5 minutes

On Thursday 6 April, the 2023/24 tax year began and if you’re an investor, it’s worth sitting up and paying attention.

Not only did the £20,000 annual ISA allowance refresh on 6 April, but the existing capital gains and dividends tax allowances were slashed.

What this all means is if you’ve investments sitting in an non-ISA account, it may be a good idea to put a a tax-free wrapper around them. But rather than simply selling your investments and then re-buying them yourself, it’s often easier and cheaper to undertake a ‘Bed and ISA.’

So, what does Bed & ISA involve? And what exactly are the advantages of shifting your investments to an ISA? Keep on reading for all of the details, or click on a link to head straight to a section…

Which tax-free allowances do investors get for 2023/24?

If you invest, it’s worth paying attention to the capital gains, dividends, and ISA allowances for the current tax year. Here’s a lowdown of what these allowance are, and how they work.

Capital Gains Tax allowance

Capital Gains Tax (CGT) may be payable when you sell an asset worth £6,000+. (A property sale doesn’t count, but only if it’s your ‘main’ home).

If you sell assets during the current 2023/24 tax year you can avoid paying any CGT if your gain is £6,000 or less. This is known as the CGT allowance.

If you sell your assets and make a profit of more than £6,000 then the amount of CGT you pay will depend on your total income. See the Gov.UK website for more information.

Crucially, investments held within an ISA wrapper are exempt from CGT.

Dividends Tax allowance

Dividends tax is the tax that is payable on, err… dividends.

Every investor does, however, get an annual tax-free dividends allowance. For the current 2023/24 tax year, the dividends allowance is £1,000.

If your dividend payments are more than this allowance the amount of tax you pay depends on your total income. Basic-rate taxpayers pay 8.75% dividends tax, higher-rate taxpayers pay 33.75%, while additional-rate taxpayers pay 39.35%. See the Gov.UK website for more details about these rates.

Like CGT, dividends tax doesn’t apply to investments held within an ISA.

ISA allowance

The ISA allowance applies to all types of ISA. For 2023/24, the annual ISA allowance is £20,000.

What is changed on 6 April 2023?

When the 2023/24 tax year began on 6 April 2023, it became much harder for investors to shield non-ISA investments from the taxman.

That’s because the CGT allowance was reduced from £12,300 to £6,000 for 2023/24. If you think that’s stingy, then bear in mind it’s set to be lowered to just £3,000 for 2024/25.

It’s a similar story for dividends. The dividends allowance was cut from £2,000 to £1,000 on 6 April. For 2023/24, it’ll be further reduced, to £500.

Besides these allowances, these were no changes to the rates of taxation on capital gains and dividends.

Why should INVESTORS consider using their ISA allowance?

If you don’t use your annual allowance in any given tax year, you lose it. In other words, you can’t carry over any unused proportion over to a future tax year.

What this all means is that if you haven’t used your full allowance for the current tax year, you won’t have another opportunity to do so in future. Given the CGT and dividends allowances have been slashed for 2023/24, it’s really worth thinking about moving over your investments to an ISA before they become even less generous in 2024/25

What is the bed & isa process?

If you have investments sitting outside of an ISA then it’s worth knowing that you can move them to a Stocks & Shares ISA. Perhaps the most obvious way to do this is to sell your non-ISA investments through an investment broker, and then immediately repurchase them within a tax-free wrapper.

This is certainty possible but it can also be rather expensive as you’d face fees for both buying and selling shares.

Thankfully, however, there is a cheaper and simpler way to go about it through ‘Bed & ISA’.

Bed & ISA is a process offered by a number of investment providers. It’s where an investment provider will move over investments held outside of a tax-free wrapper into an ISA on your behalf. It will do this by essentially selling and repurchase shares for you. This is usually done in a single transaction, so fees are usually lower compared to undertaking the process manually yourself.

Bed and ISA can be conducted across a wide range of investments, such as shares, investment trusts, and bonds. However, it can’t be done if you’re looking to repurchase international shares.

Bed & ISA is also possibile if you’ve been saving into a workplace share scheme (SIP or SAYE).

Some investment platforms that offer Bed & ISA include AJ Bell, IG, Vanguard, and Interactive Investor.

What are the drawbacks of bed & isa?

If you’re eager to move your investments to a tax-free account, there are a few drawbacks to consider.

Firstly, if you choose to Bed & ISA, understand that investments can have a different buying and selling price. This means you typically have to cover any difference when you sell and repurchase your investments.

On a similar note, the price of an investment, or investments, can change at a moment’s notice. So even if your investments are sold and then re-bought in quick succession, you could lose out if the value of your investment falls during the Bed & ISA process.

Investors interested in Bed & ISA should also be mindful that the process requires the sale of non-ISA shares. As a result, CGT may apply.

Another possible drawback is stamp duty. This 0.5% tax may apply when you repurchase shares as part of the Buy & ISA processes. Stamp duty applies to most UK-listed shares though there are some exemptions. For example, stamp duty doesn’t apply to exchange-traded funds, nor does it apply to investments in a company listed on the AIM Stock Exchange.

It almost goes without saying, but if you undertake a Bed & ISA transaction you’ll also have to take into account any share dealing fees charged by your chosen investment provider. This is why it’s really important to compare providers. Take a look at our article that explains how to find the right investment broker to learn more about this.

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Disclaimer: MoneyMagpie is not a licensed financial advisor. Information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This isn’t financial advice. Anyone thinking of investing should conduct their own due diligence. 

The tax benefits of a stocks and shares ISA may change in the future. Tax treatment depends on your personal circumstances.

Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

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Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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