Bed and ISA – Moving investments into a tax-efficient wrapper

While the name Bed and ISA might seem like an obscure expression, the idea is simple. Fairstone Chartered financial planner, Sean McParland, explains the concept, why we would recommend it, and the potential risks involved.

Bed and ISA is selling investments that you’re holding outside an ISA, and then buying the same investments back within your ISA. In effect, your investment goes to bed as a taxable fund and wakes up the next morning in a tax-efficient ISA wrapper.

Why we would recommend it?

• Unlike ISAs, non-ISA investments incur income tax on share dividends, whether taken as income or reinvested.
• They’re also liable to Capital Gains Tax on total growth – not annual growth as people often assume.
• The annual CGT allowance is lost unless a taxpayer actually realises a capital gain – for example, by selling units in an investment. Otherwise, past years’ growth is eating into this year’s CGT allowance.
• So, if your investment has grown over several years, selling units ‘harvests’ the CGT allowance for that tax year.

Selling non-ISA units and immediately reinvesting in an ISA from the same provider can maintain your chosen risk / volatility level and asset allocation, but it also places the fund in a tax-favoured wrapper. In particular, it shields the fund from any future CGT liability.

It’s important to note that you can’t ‘crystallise’ a CGT liability by selling an investment and immediately buying it back except as an ISA. Otherwise, you must wait at least 30 days between selling and buying back. So, this device isn’t possible if you’ve used all or most of your annual ISA allowance.

What are the risks – and can they be controlled?

As with most investments, there are potential risks involved. The sale of units could incur a CGT charge if the gain on the sale of units exceeds the CGT allowance – but you needn’t Bed and ISA all your units in the same year.

Another potential risk to consider is that overnight stock market fluctuation may adversely affect your investment. However, in practice, providers try to process Bed and ISA instructions quickly and seamlessly, which minimises the risk.

Bed and ISA summary

You should consider your Bed and ISA options if you:

• Have unused ISA allowance.
• Don’t want to commit cash savings to further stock market investment.
• Have significant growth in a non-ISA investment.

If you’re looking to find out more about Bed and ISA or overall investment options, a Fairstone adviser could help.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. FAIRSTONE IS NOT A TAX ADVISER AND INDIVIDUALS SHOULD SEEK INDEPENDENT TAX ADVICE FROM A PROFESSIONAL TAX SPECIALIST. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.