Bed and ISA explained

The end of the tax year is rapidly approaching, which means it’s ISA season. This is the time of year when you should check your investments both inside and outside ISAs, and plan how you will use your ISA allowance in 2023/24.

An ISA can keep the taxman away from your investments, which means that investments inside an ISA have more potential to build the wealth you want. They can grow faster, because the taxman isn’t taking a share of your profits each year, and when you come to cash them in, he will not be helping himself to part of your lump sum through capital gains or income tax.

So the more of your investments are inside an ISA the better off you can be. But there is a limit of £20,000, your annual ISA allowance, on the amount you can save or invest in an ISA.

Getting ISA protection for your investments is becoming even more urgent – because the taxman is going to take even more of your investment profits.  The capital gains tax threshold will fall in April 2023 from £12,300 to £6,000 and again to £3,000 in April 2024. The dividend tax threshold will also be reduced from April from £2,000 to £1,000 and £500 in April 2024. 

Putting your existing savings and investments inside an ISA might help make them more rewarding, because it keeps them away from the taxman. This can help growth as well as protect future gains and dividends from the attentions of HMRC. It also means you will no longer have to declare them on your self-assessment tax return.

This is easy enough for cash savings. You would simply use the cash you have in a savings account to buy a Cash ISA. 

But what about investments?

Getting your investment into an ISA

You can’t simply transfer an existing investment into a Stocks and Shares ISA. This can be frustrating especially if you have an investment that you may have spent time researching, and which is delivering the kind of performance that you want. 

But there is a way to give your investment ISA protection – the Bed and ISA technique.

The bed and ISA process involves transferring assets held outside of a tax wrapper into an ISA so any future capital growth or income on these assets is sheltered from tax.

Bed and ISA is usually arranged by your Financial Adviser. They sell the investments that you hold outside of the wrapper for you and then buys back the very same assets within a Stocks and Shares ISA. 

You can transfer up to £20,000 worth of investments each tax year.

But while it could certainly pave the way for more rewards potential for the future, there could be some issues in the short term. There may be some costs associated with the transaction. 

There’s also capital gains tax (CGT) to consider, depending on your circumstances. Bed & ISA transactions are treated as sales for CGT purposes. If this means you show gains when you sell that exceed the current annual CGT allowance tax will be due.  This is another reason to make your bed and ISA move now, as CGT allowances are being cut.

Getting some help

While there could be tax implications at the time of the sale, the long-run benefits of Bed and ISA could be significant. 

To understand the implications of for your portfolio, and getting the help you need to get ISA protection for your wealth, call us at Continuum.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.

Stocks and Shares ISAs do not include the same security of capital which is afforded with a deposit account.

The Financial Conduct Authority does not regulate taxation advice and deposit accounts.

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