Archived article: This article was correct at the time of publishing. Tax, investments and pension rules can change over time so the information below may not be current.

Bed and ISA – don’t forget to make your bed ahead of tax year-end

With less than a month until the end of the tax year, people’s attention will begin to focus on topping up tax-free accounts before the allowances reset on 6 April. There will undoubtedly be the last-minute frenzy in the final few days – last year Bestinvest saw its final ISA subscription with only four minutes to go until midnight!

Jason Hollands Jason Hollands
20 March 2018
Bed in bedroom

This year the ISA allowance is a thumping £20,000, which may seem a rather large amount for many people. However, one feature of ISA investing which many investors forget about is the ability to fund an ISA with shares or funds held outside ISAs, rather than cash – a process known as  ‘Bed and ISA’.

What is a Bed and ISA?

If you don’t have the cash available to open an ISA but you do hold shares or funds in other accounts, then it really may be worth using these to fund an ISA. 

A Bed and ISA transaction involves selling the existing investments and using the proceeds to open an ISA. The previous investment can then be repurchased within the account, or the money can be used to invest in something new. This is a great way of moxing existing investments into a tax-free wrapper so that future dividends and gains escape the clutches of the taxman.

The other benefits

This is particularly important with the annual dividend tax allowance, the amount which can be earned in dividends tax-free, set to fall from £5,000 to £2,000 on 6 April.

Dividend income above the allowance is taxed at 32.5% if the investor is a higher-rate tax payer and at 38.1% if they are an additional-rate taxpayer.

A further benefit of moving existing shares and funds into ISAs is that you will no longer have to declare these on your self-assessment tax return meaning a little less hassle when it comes to tracking down paperwork.

Be wary of your Capital Gains Tax allowance

However, when carrying out a Bed and ISA transaction it is important to make sure you do not exceed your annual capital gains allowance if at all possible. This tax year an adult can realise gains of up to £11,300 without paying Capital Gains Tax.

It is worth bearing in mind that married couples and civil partners can easily transfer or part transfer investments between them – this is called an inter-spousal transfer – without cost or tax consequences. This can be used to maximise two capital gains allowances as part of a Bed and ISA strategy.

You need to act soon

Anyone contemplating a Bed and ISA transaction should be aware that they cannot leave this until 5 April. It typically takes seven working days to sell the existing holding and receive the cleared funds to reinvest in the ISA. This may take longer if the investments to be sold are not already in an account with the broker or platform you wish to open an ISA with.

There may also be a small cost, depending on the investments being sold or purchased. At Bestinvest we don’t charge investors to sell or buy funds, and the majority of the thousands of funds available on our website have no initial charges.

Where UK listed securities are traded, such as individual company shares, investment trusts and exchange traded funds, we charge a £7.50 dealing fee for each transaction. When buying UK-domiciled company shares there is also 0.5% Stamp Duty Reserve Tax to pay on purchases as well.

For more information on Bed and ISA transactions or to get started today, please call us on 020 7189 9999 or email best@bestinvest.co.uk.

Important information

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Exchange Traded Funds (ETFs) can be high risk and complex and may not be suitable for retail investors. Prospective investors should make sure they understand all the risks involved before investing.

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