What is Bed and ISA and who should do it?

Investors are increasingly turning to Bed and ISA as we approach the end of the tax year to take advantage of their outstanding tax free allowances.

A Bed and ISA transaction lets you sell the investments in your general investment account and then buy the same ones back into an individual savings account (ISA).

If you still have your 2024/25 ISA allowance waiting to be used up, then taking advantage of a Bed and ISA can help protect your dividends and cut your capital gains tax bill.

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Tax bills have been rising over the years with frozen income tax bands, smaller annual allowances for capital gains and dividends. The capital gains tax (CGT) allowance has been cut progressively from £12,300 to £3,000, and the dividend allowance cut from £2,000 to £500.

Combined it has pushed investors to take advantage of more ways to minimise their tax bills.

Investment platform Interactive Investor recorded its busiest summer and Q3 ever last year, for Bed & ISA transactions amid speculation of a rise in CGT in the 30 October Budget.

AJ Bell also recorded a rush to take advantage of Bed and ISA with a 91% increase in September 2024 compared with September 2023.

How to cut your tax bill with Bed and ISA

ISAs are a tax-efficient way to save, and all adults have a £20,000 tax-free allowance which resets every year. Returns made in an ISA are not subject to capital gains tax, no matter how much you earn. Dividends received from investments held in an ISA are also tax-free. 

But what about the investments you hold outside of this tax wrapper? 

Some years, you might use up your entire ISA allowance and still have some money left over to invest in a regular stocks and shares account. If these investments generate any income or capital gains, you will owe money to HMRC and will need to declare this by completing a self-assessment tax return. 

Basic-rate taxpayers pay 10% CGT on investment gains and 18% on gains from the sale of additional residential properties. Meanwhile, higher and additional-rate taxpayers pay 20% on investments and 24% on properties. The CGT allowance means some profits are tax-free but, as mentioned previously, this has been slashed in recent years from £12,300 to just £3,000.

Meanwhile, dividends are taxed at 8.75% for basic-rate taxpayers, 33.75% for higher-rate taxpayers and 39.35% for additional-rate taxpayers. The dividend allowance is now only £500, after being halved in April 2023 and again in April 2024. 

As this shows, assets held outside of an ISA can quickly rack up a hefty tax bill if your investments are growing in value and paying a decent income through dividends.

It is estimated that CGT will raise £15.7 billion in 2024/25, an 8.1% increase from the previous tax year.

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. We take a closer look. 

How does Bed and ISA work?

A Bed and ISA strategy works by selling your existing investments and repurchasing them back within an ISA. Your provider will sell your investment on the open market and then move the money into the tax-efficient wrapper.

Crucially, by selling existing assets and realising gains of up to £3,000, you can stay within your annual CGT allowance. “That way you can use your CGT allowance to realise gains, and simultaneously protect this slice of investment from CGT for good,” says Sarah Coles, head of personal finance at Hargreaves Lansdown. 

What does Bed and ISA stand for?

“The reasons for the ridiculous name are buried in a trick that investors could use until 1998, called Bed and Breakfast, when they could sell assets, crystalise the gain for CGT purposes, and then immediately buy the same assets back,” Coles adds.

“The rules were changed so that you now have to wait 30 days before buying back in – or invest in something else. However, selling up outside an ISA and buying back immediately within the tax wrapper remains an exception to this rule.”

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.

What’s more, if you realise capital gains of more than £3,000 when you sell your original investments, you will need to declare this to HMRC and pay tax on the excess.

Finally, 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 lose a small amount if the repurchase price differs from the sale price.

How long does a Bed and ISA take?

You can arrange the transaction at the click of a button or tap of a screen, but the time taken for everything to be done depends on the investment platform and how long it takes to sell and repurchase assets. The process can take up to 10 working days, but it can be far quicker.

Shares are usually sold and repurchased simultaneously, but the sale and repurchase of funds can take a few days. There is a risk here that time out of the market could have a detrimental impact on your investments.

However, the tax advantages of holding investments within an SA could still outweigh any loss – and the costs incurred.

Does Bed and ISA trigger capital gains tax (CGT)?

To complete this transaction requires you to sell your holdings and rebuy them within an ISA. If you realise gains of more than £3,000 then it would trigger a CGT bill. But if you plan to hold for the long term it could still be worth it.

And by selling existing assets and realising gains of less than £3,000 in one tax year, you can stay within your annual CGT allowance and pay no CGT – provided you’ve not utilised this allowance at any other time of the same tax year.

Should you carry out a “Bed and ISA” transaction?

If you have any leftover ISA allowance, a Bed and ISA transaction could be worth considering to reduce your tax bill for the future.

Even though you might have a CGT bill to clear first, it means that future gains are not subject to this tax.

“Shifting existing investments into a tax-efficient wrapper like an ISA can pay– which, over the long term, is likely to outweigh any charges that might apply,” says Myron Jobson, senior personal finance analyst at Interactive Investor.

If you have too many investments to move them all in one tax year you could prioritise the ones paying the highest amount of dividends.

Acting sooner rather than later in the tax year could bring your overall bill down, as you are likely to accrue more income (and hopefully more capital gains) as the year progresses. 

If you’re unsure whether it’s worth it, you could speak to a financial adviser for support on weighing up the right move. Find one in your area at unbiased.com.

See our analysis on why early bird ISA investors usually fare better than their last-minute counterparts: “Early bird vs last-minute ISA investing”.