What is Bed and ISA and how can it help shield you from tax?
A Bed and ISA transaction is a great way to protect your investment returns from the taxman. With the new tax year in April approaching, should you complete a transfer now?
Completing a “Bed and ISA” transaction before the end of the tax year could significantly cut your tax burden.
The process involves moving your investments from a taxable general investment account (GIA) into an Individual Savings Account (ISA).
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In the UK, adults have an annual £20,000 ISA allowance which renews at the start of each tax year on 6 April.
For investors who want to minimise their tax burden, it is a good idea to make the most of this annual allowance each tax year – especially after the capital gains tax allowance was cut by half, and tax rates increased in the 2024 Budget.
How does Bed and ISA work?
Maximising your tax-free allowances when investing is a good way to protect more of your gains from HMRC.
The most straightforward way to do this is by investing through a stocks and shares ISA, a type of investment account where you do not have to pay tax on any of the gains or dividends that your investments generate.
Alice Haine, personal finance analyst at investment platform Bestinvest by Evelyn Partners, says: “A raft of tax changes in recent years has tightened the squeeze on savers and investors, particularly for those holding assets – such as shares or funds – outside tax-efficient wrappers, leaving many investors feeling increasingly concerned about the tax treatment of their savings and investments.
“This is why shifting investments into a tax-protected ISA or pension is becoming an increasingly attractive option for many.”
If you currently hold investments outside an ISA, and have not used your full annual ISA allowance, you can still protect future returns.
One option to do this is by completing a “Bed and ISA” transfer.
Bed and ISA is simply the process of selling investments in your taxable GIA, then buying them back inside a tax-wrappered ISA.
Haine explains: “The process allows savers to sell investments held in a taxable environment and repurchase them within an ISA. This move effectively shields those assets from future tax on income and gains.”
Completing a Bed and ISA transfer is usually quite a straightforward process as many UK investment platforms can do it on your behalf, but this is not the case for all.
If you want to protect your future returns, make sure you check with your investment platform as soon as possible as their Bed and ISA deadline will likely come before the end of the tax year.
How Bed and ISA can cut your tax bill
The amount a Bed and ISA transfer will reduce your tax bill by all depends on the size of your portfolio and how much your investments have grown over the course of the tax year.
For example, if you had a portfolio worth £100,000 and it achieved an annual return of 10%, you will have made a capital gain of £10,000.
If these investments were held in a GIA, you would have to pay a capital gains tax bill. Capital gains are taxed at 18% for basic rate taxpayers and 24% for higher and additional rate payers. You get a capital gains tax allowance of £3,000 per tax year.
In this example, your capital gains tax bill on a £10,000 return would be £1,260 if you pay the basic rate of income tax, or £1,680 if you pay the higher or additional rate of income tax.
Had you held these investments in an ISA, you would not have to pay any tax at all on these gains.
An ISA will also protect your dividends from being taxed too. You get an annual tax-free dividend allowance of £500.
If you earn dividends over £500 you will have to pay tax on them – 8.75% for basic rate taxpayers, 33.75% for higher rate payers, and 39.35% for additional rate payers. You can eliminate all tax on dividends by holding them in an ISA instead.
Dividend tax rates are rising from April 2026 too. The basic rate is increasing to 10.75% and the higher rate to 35.75%. The additional rate will remain at 39.35%.
As you can see, holding assets outside an ISA can mean you rack up a hefty tax bill if your investments grow. But a Bed and ISA transfer can help you hang onto more of your money in years where you haven’t used up all of your £20,000 allowance on new investments.
By moving your investments from your GIA, where you will have to pay tax, and into an ISA, you are shielding as many of your potential returns as you can.
As the ISA allowance refreshes each tax year, it is important that you complete the Bed and ISA transaction before the end of the tax year. This allows you to maximise the £20,000 annual allowance over multiple years.
Although future returns will be shielded from the taxman, you will still have to pay capital gains tax on returns you made before the investments were in an ISA.
How long does Bed and ISA take?
You can usually arrange a Bed and ISA transaction at the click of a button, but the time it takes for the entire process to complete will be longer than this.
The process can sometimes take up to 10 working days, but it can be shorter or longer than this depending on the provider.
For shares, the process is usually quite fast as they can be sold and repurchased simultaneously at the same price, but the sale and repurchase of funds is more complicated and can take a few days.
For longer transactions, there is a risk that time out of the market could have a detrimental impact on your investments, but the tax advantages of holding them in an ISA should generally outweigh any loss in the long term.
Does Bed and ISA trigger capital gains tax (CGT)?
Completing a Bed and ISA transaction involves selling your assets, meaning you may need to pay capital gains tax depending on how much your portfolio has grown.
Capital gains tax is triggered when you realise gains of more than the £3,000 CGT allowance, and is charged at a rate of 18% for those on the basic rate of income tax, and 24% for those on the higher or additional rates.
This means that if you complete a Bed and ISA transfer after your investments have grown by more than £3,000, you can expect to pay a tax bill.
While this may sting in the short-term, if you plan to hold those investments in an ISA for the long term, then Bed and ISA could still be worth it, as any future gains you realise will be protected from the taxman.
It is important to bear in mind that there are some costs associated with a Bed and ISA transaction. Although you won’t typically pay a fee on the initial sale of the asset, you will have to pay a fee when the investments are repurchased.
You may also need to pay stamp duty (0.5% of the transaction value) and may gain or lose a certain amount if the repurchase price differs from the sale price.
Why is it called Bed and ISA?
The name Bed and ISA is a vestige of an old quirk in investing history.
Laura Suter, director of personal finance at investment platform AJ Bell, explains: “The oddly named strategy traces its roots back to a once-popular investor loophole known as ‘Bed and Breakfasting.’
“Previously, investors could sell holdings, lock in a capital gains tax liability, and then simply buy the same investments straight back again.
“That door has since been firmly closed. Today, investors have to wait 30 days before repurchasing the same asset, or opt for a different investment instead. But the Bed and ISA process is one way around that.”
