How to use market dips to shelter more shares from tax

A ‘Bed & ISA’ is a neat way of helping you to use your ISA allowance while making your portfolio more tax efficient.

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  1. Rob Morgan

Markets are going through a painful period right now. As I wrote earlier this week, investors are struggling to make sense of what the spread of COVID-19 means for economic growth and company earnings. Nobody really knows how its going to pan out, but we don’t think long-term investors should panic. Markets have a tendency to recover over time, and sitting tight can mean your portfolio takes full advantage when they do.

One action you should consider right now, though, is using your ISA allowance before April 5th – the end of the tax year. Investing in an ISA is a great way of building up investments tax efficiently with no tax to pay on any income or capital gains. That’s why investors try to maximise the use their ISA allowance, presently £20,000, each tax year.

One way to help use up this allowance is through investments you own outside an ISA through a process known as a ‘Bed & ISA’.

Putting existing investments into an ISA could cut future tax bills. They will be sheltered from UK income and capital gains tax, and from any future tax rises. And when markets drop, you can get more of your investments into your ISA so now could be an opportune time to use this method.

Invest tax-efficiently and use your capital gains allowance

A Bed & ISA involves selling holdings and then buying them back simultaneously within the ISA wrapper. The sale crystallises any capital gain or loss made, so selling or partially selling an existing investment could help with tax planning by using some of your capital gains allowance while keeping your holding.

You can make gains of up to £12,000 this 2019/20 tax year free of Capital Gains Tax (CGT), but should this allowance be exceeded CGT would become payable. If you generate a loss on a sale, and you declare this on your tax return, this could be carried forward to offset against capital gains in future years. There is an explanation of CGT and reporting capital gains or losses to HMRC here.

Once inside an ISA, though, any future gains are not subject to CGT and there is no further tax to pay on any income. Remember, tax rules and the tax treatment of investments can change over time, tax benefits will depend on your individual circumstances and you may not get back what you originally invested.

Tidy up your portfolio

As well as harvesting capital gains while maintaining existing investments, a Bed & ISA can be used to tidy up small or non-tax-efficient parts of your portfolio or make more of neglected holdings. It could also reduce the work required to complete your tax return.

If you are not going to use this in full with new money then you could consider a ‘Bed & ISA’ for any existing holdings in a Charles Stanley Direct Investment Account. Remember, if your ISA allowance isn’t used for a particular year it is lost forever. You can also buy back different investments in the ISA rather than the same ones if you wish.

Our platform fees are aggregated across all your accounts meaning the ongoing costs are the same for holding shares inside or outside a Charles Stanley Direct ISA.

How to Bed & ISA

A Bed & ISA is easy to arrange. 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 £11.50 for each purchase and £11.50 for each sale. Stamp duty of 0.5% (not applicable to AIM shares) is payable as well as the Panel on Takeover and Mergers Levy of £1 on any deal over £10,000. These charges together with the difference between the buying and selling prices, known as the bid-offer spread, means fewer shares are repurchased in the ISA than sold.

To place instructions call us on 0131 550 1234 during UK market hours and we will do the rest for you. To do this for this tax year you need to place instructions no later than 4.00 pm on Tuesday, 31st March 2019 – but ideally earlier to ensure it can be completed in time – and you must have a valid ISA application in place.

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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