Though it may be one of the more unusual pieces of jargon in the financial service industry’s lexicon, Bed and ISA is actually a pretty simple process. In this article, we will explain what Bed and ISA is and how it can help you make the most of your annual ISA tax-free allowance without needing to find extra cash.
What is Bed and ISA?
Bed and ISA is a process used by investors to move investments held outside their ISA into a stocks and shares ISA. The aim is to protect any future capital growth and income from tax. It also lets you make the most of the annual ISA allowance when you don’t have ready cash to pay in.
Essentially, two deals are carried out at the same time. First, you sell an investment and transfer the proceeds into your stocks and shares ISA, then you immediately use those funds to buy back the same investments.
The reason shares must be sold and the cash paid into the ISA first is that HMRC does not allow the movement of shares into an ISA. You can carry out a Bed and ISA across a wide range of UK investments such as shares, investments, trusts, ETFs, and bonds.
What are the advantages of Bed and ISA?
Carrying out a Bed and ISA can help ensure you invest as tax-efficiently as possible.
Bed and ISA might suit you if you’ve inherited or accumulated investments outside an ISA. These investments may be incurring charges that you wish to mitigate. It could make sense for you to transfer these investments into a tax-efficient ISA.
For all investments held outside an ISA, the annual capital gains allowance for individuals is £3,000 and the dividend tax-free allowance is £500 in the 2024/25 tax year. Any income from cash, funds, gilts or bonds is tax-free up to the personal savings allowance of £1,000 (for basic rate taxpayers) or £500 for higher rate payers. Additional rate payers have no allowance.
Once the transactions are complete and your investments are held in an ISA any future returns will be protected from capital gains or income tax.
Please note that St. James’s Place do not offer a Lifetime ISA.
The Bed and ISA process may help you make the most of your tax-free allowance
In 2024/25 the annual ISA allowance is £20,000. You can put it all in one ISA or split it across many, but you can only pay £4,000 per year into a Lifetime ISA. From April 6th 2024, the government changed the rules so you can pay into more than one type of ISA in the same tax year. An ISA is the most tax-efficient investment ‘wrapper’ so it makes sense to use the entire allowance. If you don’t have enough cash to put into a stocks and shares ISA because you need that money for other expenses then it’s worth transferring other tax-chargeable investments.
How does Bed and ISA work?
Because you can usually only subscribe to a stocks and shares ISA with cash, you’ll need to sell your investments on the open market to fund your ISA subscription. This is the ‘bed’ part of the transaction.
Once the investments are sold, the proceeds are moved into your stocks and shares ISA. The amount you move can’t exceed the annual ISA allowance minus any contributions already made in the current year. Then, you buy back the same investments within your ISA to complete the process.
How much will Bed and ISA cost?
The cost of transferring investments into your ISA varies. Typically, you only pay one dealing charge rather than separate charges for the sale and repurchase. However, any profit made from the sale of shares is still liable for capital gains tax and you may have to pay stamp duty on the repurchase, depending on the type of investment. There could also be a panel of takeover and mergers levy to pay on both sides of the trade depending on the shares and the consideration of the trade.
With selling and rebuying shares there’s a risk of price movement when you’re out of the market. This means there might be a difference in sell and buy price between the opening and close of the trade. In addition, many investments have a lower price to sell than the price for you to buy them. This is known as the bid-offer spread and often results in you buying back fewer shares than you originally had.
Bed and ISA Made Easy
Despite the cryptic term, Bed and ISA is a simple process which lets you transfer other investments into your stocks and shares ISA. It may benefit you if you hold substantial investments outside your ISA and will save considerable amounts of tax if you move them into a tax-efficient ISA. The annual ISA allowance lets you save up to £20,000 a year tax-free, so it’s worth making the most of this if you can.
The value of an investment with St. James’s Place may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.
At Cooper Associates Wealth Management, our financial consultants can help you quickly and easily carry out the transactions so you can maximise your ISA allowance and minimise capital gains tax and other potential charges on the growth of your investments. We’ll help you make the most of your savings and investments, so your money goes further. To find out more about how our specialised services can simplify the complexities of financial planning visit our ISA page today to learn more about getting the best deal on your savings.
