It's time for a Bed & Isa before a capital gains tax raid hits

Investors who want to protect an existing portfolio from tax may be able to do so using a process known as Bed and Isa. But experts warn they will need to get their skates on.

Doing a Bed and Isa transfer now before the new tax year could save some investors with sizeable portfolios hundreds of pounds.

Not only does this process get your investments into the tax-free wrapper of a stocks and shares Isa, but it also means you can take advantage of this year’s capital gains tax allowance before it is slashed on 6 April.

What’s a Bed & Isa?

The esoterically-named Bed and Isa process involves transferring investments held outside a tax wrapper into an Isa. That means that any future investment growth is sheltered from tax.

Most investment platforms will carry this out on your behalf so you don’t have to sell all of your holdings yourself one by one and then buy them all again.

Bed and Isa transfers have soared in popularity in recent months, ever since cuts to the Capital Gains Tax (CGT) and dividend tax allowances were announced by Chancellor Jeremy Hunt in the Autumn Statement last November.

The CGT allowance will be slashed from £12,600 to £6,000 from April 6, and then again to £3,000 in April 2024. 

The dividend tax allowance falls from £2,000 to £1,000 and then to £500 in April 2024.

Why it might make sense to Bed & Isa now

If you move your portfolio through a Bed and Isa transfer, you may have to pay capital gains tax on any gains. 

But, once safely in your Isa, any future profits and dividends are tax free. 

Importantly, by transferring before the new tax year, you will benefit from the higher capital gains tax allowance of £12,300. This could make a significant difference to those with large profits or portfolios built up outside of a stocks and shares Isa.

Bed and Isa transfers contribute towards your Isa allowance. But with most people unable to save or invest the full £20,000 annual Isa allowance in fresh money, a Bed and Isa can help use up a portion that would otherwise go unused.

How a Bed & Isa could pay off

The annual capital gains tax-free allowance will be cut from £12,300 to £6,000 when the new tax year starts on 6 April 2023. It is then due to fall even further to just £3,000 from the 2024 tax year.

Currently, a higher rate taxpayer making a £15,000 capital gain would pay tax on just £2,700 of that profit, landing them with a £486 bill.

But if they were to make the same gain after 6 April 2023, they would be liable for tax on £9,000 of their profits, meaning a tax bill more than three times bigger at £1,620.

The dividend tax-free allowance is due to be cut too, falling from £2,000 to £1,000 from 6 April. It will then be halved again to just £500 from the 2024 tax year.

A higher rate taxpayer investor getting £2,000 of dividends each year would currently pay no tax on their income from investments.

From 6 April, they would face tax on the £1,000 of their dividends above the new £1,000 tax-free allowance and lose £337.50 to tax.

Reinvested dividends compounded over the years are one of the major drivers of stock market total returns, so protecting them in an Isa means gains can mount up with tax eating into them.

Don’t leave it to the last minute 

If you do plan to do a Bed and Isa then it is important to leave yourself enough time to sell and buy back investments.

This is even more vital as the end of the tax year looms, as missing the deadline could deliver a bigger capital gains tax bill.

Jason Hollands, managing director of investment platform Bestinvest, says: ‘Do not leave it too late. 

‘The process takes a few days as the sale of your existing investments will take time to clear before the cash is available.’