What is Bed and ISA - what is it and why you need to act soon

The dividend tax allowance will drop from £1,000 to £500 in April 2024. Can a Bed and ISA help reduce what you hand over to the taxman? We explain what a Bed and ISA and why you only have around six weeks left to make use of it

Person in bed looking at investments on mobile
(Image credit: Getty Images)

With the dividend tax allowance dropping from 6 April 2024, now is the time to maximise your ISA allowance and make sure you make the most of the profits. 

The annual Capital Gains Tax exemption will halve from April 6 - from £6,000 to £3,000 - that’s less than quarter of the £12,300 available in the 2022/23 tax year. 

The annual dividend tax allowance was already cut in April 2023 from £2,000 to £1,000 and this April it will be cut in half again from £1,000 to £500. Back in 2017/18 is was £5,000 - so investors are looking at around a 90% reduction.

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We explain how the Bed and ISA process can help and if it is right for you.

A Bed and ISA involves transferring assets held outside of a tax wrapper into an ISA so any future capital growth or income on these assets is sheltered from tax.

Although this strategy has some disadvantages, it could be worth it as the Treasury clamps down on tax breaks available to investors. 

Investment platform interactive investor (ii) sais it has seen its busiest ever January for Bed and ISA applications as savers try to reduce their tax bill. 

Bed and ISA instructions shot up 7% in January 2024 compared to the same period in 2023. Last year, ii said it saw a 53% increase in application compared to 2022. Other platforms too, have seen similar demand with Best Invest also saying it saw Bed and ISA applications double.

Myron Jobson, senior personal finance analyst, interactive investor, says: “We’re facing the highest overall tax burden in a generation thanks to the deep freeze of tax thresholds and allowances which, in tandem with wage inflation, means we’ll be more in tax in the years to come.

“The shrinking capital gains and dividend tax allowances provide the impetus for investors to invest through a tax-efficient wrapper if they haven’t already done so. Shifting investments into an ISA protects future gains and dividends from the clutches of tax. Known as Bed & ISA, the process is a valuable tool as part of a broader portfolio spring clean strategy. The transfer, however, will involve selling and buying back shares, which could trigger a capital gains tax bill.

“Bed & ISA is a tried and tested route to wrapping existing investments to generate the long-term benefits of a tax-efficient ISA – which over the long term is likely to outweigh the charges that might apply.”

Here's how a Bed and ISA can help you reduce your tax bill - and why you need to act fast if you're looking to take advantage of the process.

How much tax will I pay? How to cut it with a Bed and ISA

ISAs are a tax efficient way to save, and everyone currently has a £20,000 tax free allowance, which resets every tax year. Returns made in an ISA are not subject to tax, no matter how much you earn. Dividends received in an ISA are also shielded from the taxman.

But, what about the money you have outside of this tax wrapper? Well, these are subject to tax for anything you earn above £1,000; the rates are currently  8.75% for a basic rate taxpayer, 33.75% for higher rate taxpayer and 39.5% additional rate taxpayer. 

The dividend tax allowance was as high as £5,000 for the tax year 2018/19, before it was reduced to £2,000 back in 2019/20. It was cut to £1,000 for the tax year 2022/23 and will be at its lowest for 2024/25 at £500. Over a million people are expected to pay more tax, but a Bed and ISA could potentially help.

How does a Bed and ISA work?

Savers can easily transfer their assets from a cash savings account into a cash ISA, but it’s not as straightforward with investments, as you usually need cash to buy the investments..

One strategy is to use the so-called bed and ISA switch. This strategy involves transferring assets held outside of a tax wrapper into an ISA. It basically means selling your investments and then repurchasing them back within an ISA - your provider will sell your investment on the open market ‘bed’ and then move the money into an stocks and shares ISA and  repurchase the same investments. 

If you use a Bed and ISA service you will only be buy back the same investments

It is worth noting that not all trading platforms offer a Bed and ISA service and it is only an option if you still have some of your annual £20,000 ISA allowance remaining.

How much does a Bed and ISA cost? 

There are some costs associated with the transaction. You won’t pay a fee on the initial sale cost of the asset, but will pay a fee on the repurchase of the investments. You may also need to pay stamp duty (0.5% of the transaction value) and may lose a small amount if the repurchase price differs from the sale price. 

Will I have to pay Capital Gains Tax (CGT)? 

When you sell a taxable asset, in this instance your investments currently outside of the tax wrapper, you will pay CGT on anything above £6,000.

Myron Jobson, senior personal finance analyst at interactive investor, says: “There might be CGT implications, depending on your circumstances as Bed & ISA action is treated as a sale for CGT purposes. This means that gains that exceed the current annual CGT allowance are liable to tax.”

Still, when assets are in a stocks and shares ISA you won’t need to pay any tax on those assets in future.

Kalpana Fitzpatrick

Kalpana is an award-winning journalist with extensive experience in financial journalism. She is also the author of Invest Now: The Simple Guide to Boosting Your Finances (Heligo) and children's money book Get to Know Money (DK Books). 

Her work includes writing for a number of media outlets, from national papers, magazines to books.

She has written for national papers and well-known women’s lifestyle and luxury titles. She was finance editor for Cosmopolitan, Good Housekeeping, Red and Prima.

She started her career at the Financial Times group, covering pensions and investments.

As a money expert, Kalpana is a regular guest on TV and radio – appearances include BBC One’s Morning Live, ITV’s Eat Well, Save Well, Sky News and more. She was also the resident money expert for the BBC Money 101 podcast .

Kalpana writes a monthly money column for Ideal Home and a weekly one for Woman magazine, alongside a monthly 'Ask Kalpana' column for Woman magazine.

Kalpana also often speaks at events. She is passionate about helping people be better with their money; her particular passion is to educate more people about getting started with investing the right way and promoting financial education.