Bed and ISA: What is it? And should you do it by April 6?

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

Not only does the £20,000 annual ISA allowance refresh on Thursday, but the existing capital gains and dividends tax allowances will be slashed.

What this all means is if you’ve investments sitting in an non-ISA account, it may be worth putting a tax-free wrapper around your assets BEFORE the new tax year begins. 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 within the next few days? 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 (which ends in a few days). 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 2022/23 tax year – which ends at 11.59pm on 5 April – you can avoid paying any CGT if your gain is £12,300 or less. This is known as the CGT allowance.

If you sell your assets and make a profit of more than £12,300, 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 2022/23 tax year, the dividends allowance is £2,000.

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. The current £20,000 annual ISA allowance will remain unchanged for the 2023/24 tax year.

What is changing from 6 april?

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

That’s because from Thursday the CGT allowance will be 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 is going to be cut from £2,000 to £1,000 on Thursday. For 2023/24, it’ll be further reduced, to £500.

Besides these allowances, the rates of taxation on capital gains and dividends won’t change for 2023/24.

Why should INVESTORS consider using their 2022/23 ISA allowance?

While the £20,000 tax-free ISA allowance will be refreshed on Thursday, its important to understand that 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 2022/23 before 6 April, you won’t have another opportunity to do so. Given the CGT and dividends allowances are set to be slashed next week, it’s really worth thinking about moving over your investments to an ISA while you can still take advantage of the current, more generous, 2022/23 allowances.

Think about it this way…

Say you’ve only used £1,000 of your allowance for 2022/23 and you decide to keep a substantial sum in a non-ISA account. If, over the next couple of months you decide to sell your non-ISA investments, you’d only be able to take advantage of the lower £6,000 CGT allowance, as opposed to the £12,300 available today (until Wednesday anyway!).

This means that if you make a capital gain of £12,000 on your investments in future, £6,000 of it would be liable for CGT (£3,000 from 2024/25).

In other words, if you’d instead put your skates on and transferred across £19,000 your remaining allowance into an ISA before 6 April – and potentially another £20,000 after April 6 for 2023/24 – it’s likely you’d have saved yourself from a large CGT bill in the future.

Don’t wait until the last minute to use your isa allowance

Given the end of the tax year is now just days away, it’s typically the time of year where many investors rush to open, or use up their remaining ISA allowance.

If you haven’t yet used your allowance for 2022/23 but you’re keen to make the most of it, take a look at this article that explains why you shouldn’t wait until the very last minute to open a stocks & shares ISA.

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. One way to potentially minimise CGT is to undertake two different Buy & ISA processes – one for the current 2022/23 tax year, and one for 2023/24. That’s because you’d be buying and selling shares over two tax years, so you’d be able to benefit from two CGT allowances (though from 2023/24, this allowance is shrinking to £6,000 as mentioned above).

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.

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