Capital gains tax (CGT) is becoming an increasing concern for domestic investors as the government looks to shore up public finances in an economically difficult post covid era. Here at Fairey Associates, we have tools available to help manage and mitigate potential CGT liabilities for clients. Take a look at this mailer to see one popular strategy being used by investors to address this concern.
What is a bed and ISA?
A bed and ISA transaction is the process of selling investments held in a general investment account, transferring the cash, and then buying back the same assets within a stocks and shares ISA. This transaction is only facilitated by certain investment providers and is done almost simultaneously to minimise any big moves happening in the market from the point of sale to the point of repurchase.
Why could this be beneficial to an investor?
The government, in November 2022, cut the capital gains tax (CGT) allowance from £12,300 to £6,000 which commenced from April 2023. Further cuts are on the horizon, with the allowance being halved to £3,000 in the 2024/25 tax year. This creates much less of an incentive for all investors, from a tax point of view, to hold assets in a general investment account - with higher and additional rate taxpayers feeling more of the pain.
Luckily, each investor has a £20,000 annual ISA allowance which they can utilise to avoid paying any tax on the gains they make on investments held within an ISA. There are range of ISAs to account for different investor needs and risk profiles but it is most commonly a Stocks and Shares ISA that is used in the Bed and ISA transaction.
Bed and ISAs are particularly beneficial for an investor in the instance that they wish to keep their investments that are currently held outside of an ISA but wish to shelter themselves from any tax made on those investments. It is also a way to benefit from the government’s very generous ISA allowance without any readily available cash on hand.
This process has already shown investor interest. Between November 2022 and February 2023, AJ Bell “saw a 387% increase in platform Bed and ISA transactions compared with the same period in 2021/22”[1].
What are the risks and disadvantages associated with this transaction?
As with everything in the investment world, there are some downsides. It is possible an investor may incur stamp duty charges if they hold individual shares or ETFs. Additionally, dealing charges from investment providers when selling and repurchasing their investments will be due. An investor should also be aware of the possibility of market fluctuations which may not work in their favour.
Additionally, an investor should be aware of their tax position within their general investment account as selling investments held in this type of account may generate CGT implications. With even less generous CGT allowances being forecasted this is an issue to consider.
[1] https://moneyage.co.uk/bed-and-isa-transactions-surge-since-chancellors-november-tax-changes.php
Risk Warnings:
The value of an investment and the income from it could go down as well as up.
All investing is subject to risk, including the possible loss of the money you invest.
Past performance is not a reliable indicator of future results.
Diversification does not ensure a profit or protect against a loss.
Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice as at 20th April 2023. You are recommended to seek competent professional advice before taking any action.
