- April was a record month for Bed and ISAs at AJ Bell, with total transactions for the month up 74% in a year
- Bed and ISA transactions tend to be most popular at the start of the new tax year
- So far this tax year, the peak day was 9 April – as investors got into their stride after the Easter break
- Bed and ISAs have been increasingly popular, thanks to rate hikes for dividend and capital gains tax, cuts to both tax allowances and frozen income tax thresholds
- What is a Bed and ISA?
- Six things to consider if you’re planning to Bed and ISA this year
Sarah Coles, head of personal finance at AJ Bell, comments:
“The number of AJ Bell investors using Bed and ISAs in April hit a new record, as they rushed to protect their investments from the ever-greedier grasp of the taxman. April is always boom-time for Bed and ISAs, but the new record is thanks to a combination of ferocious tax attacks and market volatility.
“Some investors will likely have taken advantage of market ups and downs at the start of the tax year to Bed and ISA when their investments had fallen in value. If you crystallise a gain when it has dropped, you can Bed and ISA more of it within your annual capital gains tax allowances, and benefit from the market recovery within the tax wrapper.
Source: AJ Bell. Customer online and telephone Bed and ISA transactions between 6-30 April since 2021.
Tax attacks
“Within a Stocks and Shares ISA, investments grow completely free of capital gains tax or dividend tax. Outside tax wrappers, meanwhile, investors have seen tax attacks from all sides.
“The former government cut the capital gains tax allowance from £12,300 in April 2023 to £3,000 a year by April 2024. At the same time, it slashed the dividend allowance from £2,000 a year to £500. It means more investors with smaller portfolios are being exposed to these taxes, and those with larger portfolios outside an ISA are paying bigger bills.
“To make life even more difficult, the current government raised the capital gains tax rate on stocks and shares from 10% to 18% for basic rate taxpayers and 20% to 24% for higher and additional rate taxpayers in October 2024. Then, in April this year, it raised the rate of dividend tax for basic and higher rate taxpayers by two percentage points.
“All this has happened against a backdrop of frozen income tax thresholds, so that pay rises have pushed millions of people into paying income tax, and millions more into paying it at higher rates. Tipping over a threshold automatically increases the rate of dividend tax and capital gains tax due on investments outside an ISA or other tax wrapper.
What is a Bed and ISA?
“A Bed and ISA is a process that lets you sell stock market investments and realise gains outside of a tax wrapper, then buy back exactly the same investments within an ISA. Investment companies, including AJ Bell, offer a service that lets you do this as a single process.
“It means you can take advantage of this year’s capital gains allowance by crystallising the gain, and at the same time you can move the investments into an ISA, where they will be protected from both capital gains tax and dividend tax in future.
You can’t do the same thing outside an ISA, because the rules stipulate if you buy the same investments back within 30 days, for tax purposes they’re not considered to have been sold at all. It would mean when you eventually sold up, the capital gain would be calculated from when you first bought them – so you wouldn’t have gained anything from selling and buying back in the interim.
Make the most of Bed and ISAs this year
“There are six things to bear in mind for those thinking about using Bed and ISAs to protect their investments from taxes:
- When you sell the assets, you may make a capital gain. It can make sense to focus on realising assets that won’t bust your capital gains tax allowance for this year.
- Think about your losses too. At volatile times, some investments may have lost value since you bought them. If you move loss-making assets, you can offset these losses against gains elsewhere when calculating how much capital gains tax is due.
- If you have both growth and income assets outside your ISA, consider moving the income-producing assets inside first. The rate on dividends is higher than that on capital gains, and you often have less control over the timing of income than you do over when you realise a gain.
- Keep an eye on your overall annual £20,000 Stocks and Shares ISA allowance. Bed and ISAs will eat into this allowance, so make sure you have enough available.
- Only investments that are traded on an exchange are eligible. That includes UK-listed and most internationally-listed shares, investment trusts, ETFs and bonds, but not investment funds (OEICs and unit trusts).
- Although you’ll only pay one dealing charge, other charges linked to buying and selling shares will apply. These include stamp duty on the repurchase on most UK-listed shares and FX charges on the sale of international shares.”
