Can I move my investments into tax wrappers? Understanding ‘Bed and ISA’ transfers
It’s possible that you haven’t heard the term ‘Bed and ISA’ before. But it’s worth taking the time to become familiar with the concept, as it may help you make the most of your tax-free allowances when investing.
A Bed and ISA transfer involves moving investments that you own outside your stocks and shares ISA (for example, in a General Investment Account) into this tax-efficient wrapper.
These investments cannot be transferred directly, so you sell the investments outside the ISA and simultaneously buy the same investments back within the ISA.
The aim is to end up with the same portfolio as before, but with everything inside an ISA wrapper. Once the transfer has taken place your investments will be free of tax on any potential growth or returns.
Who might consider a Bed and ISA?
A Bed and ISA strategy can be useful in several scenarios.
You may have inherited or accumulated investments outside an ISA in earlier years – perhaps because you were using your ISA to save for a house deposit or you were able to invest more than the annual allowance.
Perhaps you simply wish to secure this year’s ISA allowance without finding extra cash to put into a tax-efficient account after day-to-day living expenses.
For our clients, if you already invest in one of our portfolios through a J.P. Morgan Personal Investing General Investment Account (GIA), a Bed and ISA transfer can make sense.
Why Bed and ISA with J.P. Morgan Personal Investing?
Carrying out a ‘fund redistribution’ (a Bed and ISA transaction between your GIA and your ISA) means you won’t pay capital gains tax on future growth and returns from your investments within the ISA, nor will we charge you for the transaction. It's important to remember that selling your GIA holdings to move them into an ISA could trigger a capital gain or loss, which could result in tax to pay if any gain exceeds the capital gains tax allowance.
Our simplified process means you can carry this out in one transaction, while maintaining access to your J.P. Morgan Personal Investing portfolios.
Once the transaction is complete and your investments are held within the ISA wrapper, any future returns will be free from capital gains and income tax.
How does Bed and ISA affect your ISA allowance?
Everyone has an annual ISA allowance, currently £20,000 per tax year, which can be used in a stocks and shares ISA, a cash ISA, Lifetime ISA or a mixture of them all.
If you carry out a Bed and ISA transaction, this must be done within your £20,000 a year annual limit. If you have more money in your GIA to transfer into an ISA, you can redistribute more funds into your ISA in the next tax year.
For example, if you already have £4,000 in an ISA, and £20,000 in a GIA, the most you could redistribute from your GIA to your ISA would be £16,000. You'd have to wait until the new tax year to add the remaining £4,000 from your GIA.
What are the benefits of funds redistribution?
The benefit of a Bed and ISA transfer is that you won’t pay capital gains tax or income tax on any future returns on your investments. It’s also a helpful way to ensure the money you have invested is working as tax efficiently as possible, even if you don’t have new money to invest in the current tax year.
Is Bed and ISA worth it?
A Bed and ISA transaction could potentially save you a significant amount of money over time. Once your assets are held in the ISA, they have the potential to grow over many years, free of both income tax and CGT.
You also need to understand the potential costs you could incur through a Bed and ISA transaction. Even though the transaction itself is free, you may find that you end up with a slight price difference in the assets held in your old GIA and your new ISA. This is because many investments have a lower price for you to sell at than the cost of buying them – a phenomenon known as the “spread” – which is how some fund traders make profit. At J.P. Morgan Personal Investing, your money will not be out of the market, however, as we will buy the ISA stock from the GIA in the same trade.
Does Bed and ISA trigger capital gains tax?
If you sell shares or funds outside an ISA for more than you bought them for, you may trigger capital gains tax. Everyone is currently allowed to make £3,000 of tax-free capital gains a year, and above that, the rate of tax payable depends on your income tax band. However, over time, these costs may be outweighed by the benefit of any tax-free growth. If you make a loss on any investments, this could offset any other capital gains you have made this year or will potentially make in future years.
You could also choose to carry out several Bed and ISA transactions across tax years, so that you use your capital gains allowance each year without triggering the tax.
What is the Bed and ISA 30-day rule?
One thing you must be aware of when considering a Bed and ISA transaction is the so-called 30-day rule.
This rule was introduced to stop a practice known as ‘Bed and Breakfasting’ where investors sold their assets at the end of the tax year, utilised their capital gains allowance and then bought them back again quickly at the beginning of the next tax year.
Under the terms of this rule, you must wait 30 days to buy the same investment again – or use the price you had previously paid for the assets to calculate your capital gains liability. However, when you carry out a Bed and ISA transaction, the investments would not be liable for any capital gains tax in the future as they would be in a tax-exempt ISA wrapper, so you would not be "Bed and Breakfasting".
Are there any risks to Bed and ISA?
No investment strategy is entirely without risk, but our Funds Redistribution feature makes a Bed and ISA strategy as easy as possible.
You should consider the following points:
1. Capital gains tax
Selling shares or funds and triggering a gain over your capital gains tax-free allowance could trigger a tax charge.
2. Use of your ISA allowance
Using a Bed and ISA transaction to fill, or partly fill your ISA, uses your annual ISA allowance in the same way as making a cash contribution. For example, if you use Bed and ISA to move £10,000 from a GIA to within an ISA wrapper, you have used £10,000 of your annual ISA allowance.
In the current tax year, this would count as a contribution to a stocks and shares ISA. Meaning, if you have stocks and shares ISAs elsewhere, you wouldn't be able to contribute more than £10,000 to them as well.
Risk warning
As with all investing, your capital is at risk. The value of your portfolio with J.P. Morgan Personal Investing can go down as well as up and you may get back less than you invest. ISA eligibility rules apply. Tax rules vary by individual status and may change. This is general information, not personalised tax advice.