How tax changes have increased the appeal of a “Bed & ISA”

A “Bed & ISA” is a convenient way to help use up your ISA allowance and make your portfolio more tax efficient. Rob Morgan outlines the pros and cons in light of recent tax changes.

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  1. Rob Morgan

What is a Bed & ISA?

A Bed & ISA is a way of transferring assets into an ISA so that future investment growth and income is sheltered from tax. It is a helpful way of using up some or all of an ISA allowance if no cash is available, or to tidy up small or neglected holdings whose income would otherwise have to be declared on a tax return. However, the process involves selling the investments and then buying them back within the ISA wrapper - so the sale crystallises any gain or loss made for capital gains tax (CGT) purposes.

The advantages

Sheltering assets from tax on any growth or income in the future is clearly an appealing idea in most circumstances. However, there have been two important changes to personal taxation this tax year that could increase the attraction of a Bed and ISA. First, reforms to dividend tax mean that dividend income above the Dividend Allowance of £5,000 is taxable at the following rates for the 2016/17 tax year:

Basic rate 7.5%;
Higher rate 32.5%;
Additional rate 38.1%. 

This means that basic rate tax payers receiving dividends in excess of £5,000 will not only have to pay more tax but are now required to fill in a self-assessment tax return.

Secondly, bank and building society interest is paid gross from this tax year, which could mean a new administrative burden for those with interest in excess of the new Personal Savings Allowance of £1,000. Again, some basic rate tax-payers that have not previously had to complete a tax return will need to. Remember, this savings income includes interest payments from most fixed income and bond investments too.

With no extra charges for holding assets in an ISA with Charles Stanley Direct, the option to shelter more investments from tax and to exempt their income from declaration on a tax return is an attractive one.

The disadvantages

A Bed & ISA is treated as a sale for CGT purposes, which means that if the gain, when added to your other gains for the tax year, exceeds the annual CGT allowance of £11,100 (in 2016/17) you will have to pay tax. Recent changes to CGT mean that the tax bill could be lower than before. Although annual allowance of £11,100 is the same as last tax year’s, the rates of CGT have fallen; For non-residential property investments the basic rate is now 10% rather than 18% previously, while the higher rate has reduced from 28% to 20%.

Remember, tax rules and the tax treatment of investments can change over time, benefits will depend on your individual circumstances and there is a risk to the capital invested. Capital gains or losses may be required to be reported to HMRC – see for further details.

There are also costs involved with a Bed & ISA. When selling and buying shares there is a difference between the buying and selling prices, known as the bid-offer spread, to be taken into account. So together with dealing commission and stamp duty it means fewer shares are repurchased in the ISA than sold.

When to Bed & ISA

Selling an existing investment via a Bed & ISA could help with tax planning by using up some of your capital gains allowance while keeping your holding. However, if you have sizable gains on your investments and/or your income is likely to vary, it is worth considering the most opportune time to implement it. For example, you can choose which assets to Bed & ISA or sell and crystallise and gains or losses, and the tax year in which to do it. Losses, if declared, can also be carried forward to set against future gains.

The amount of CGT you pay on gains in excess of the annual allowance also depends on your income for the tax year. If your earnings are likely to drop in a subsequent tax year it can make sense to defer any sales and Bed & ISAs; or, if your income is going to be fairly even, to spread transactions over two or more tax years.

Another factor to consider is recent performance. If the investment has recently dipped in value you could either end up with more shares into your ISA or use less of your ISA allowance.

How to Bed & ISA

A Bed & ISA is simple to arrange. When you Bed & ISA with Charles Stanley Direct you can sell shares in your Investment Account and use the proceeds to top up your ISA, buying the same shares back straight away and paying just £10 for each purchase and £10 for each sale. To place instructions call us on 0131 550 1234 during market hours and we will do the rest for you. If you are uncertain as to whether Bed & ISA is suitable, please seek advice from a suitably qualified investment professional.

This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in collectives should only be made after reading the Key Investor Information Document, Supplemental Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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