What is Bed and ISA and how can it help shield you from tax?

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How does Bed and ISA work?
How Bed and ISA works
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Does Bed and ISA trigger capital gains tax (CGT)?

Completing a “Bed and ISA” transaction before the end of the tax year could significantly cut your tax burden.

Despite a confusing name, the process involves moving your investments out of a general investment account (GIA) and into an Individual Savings Account (ISA).

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All adults in the UK 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 £20,000 allowance – 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.

James Norton, head of retirement and investments at Vanguard Europe, told MoneyWeek: “It’s more important than ever to think about how to protect your savings from tax and give your money the best chance to grow. One of the easiest ways to reduce any capital gains tax you might pay is to use your ISA allowance.”

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 “simply means selling investments in your general account, using that cash to put money into your ISA, and then buying back the same investments inside the ISA. You keep the same portfolio, but it now sits in a more tax‑efficient account,” Norton explains.

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.

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 faster or longer in other cases.

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 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.

Sarah Coles, head of personal finance at Hargreaves Lansdown, explained: “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.”

“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.”

Daniel is a financial journalist at MoneyWeek, writing about personal finance, economics, property, politics, and investing.

He covers savings, political news and enjoys translating economic data into simple English, and explaining what it means for your wallet.

Daniel joined MoneyWeek in January 2025. He previously worked at The Economist in their Audience team and read history at Emmanuel College, Cambridge, specialising in the history of political thought.

In his free time, he likes reading, walking around Hampstead Heath, and cooking overambitious meals.